Article V, Section 3(a), (b), and (c) Use of Fund Resources
- International Monetary Fund
- Published Date:
- May 2008
Interpretation of Articles of Agreement
The Executive Directors of the International Monetary Fund interpret the Articles of Agreement to mean that authority to use the resources of the Fund is limited to use in accordance with its purposes to give temporary assistance in financing balance of payments deficits on current account for monetary stabilization operations.
Pursuant to Decision No. 71-2,
September 26, 1946
Use of Fund’s Resources for Capital Transfers
After full consideration of all relevant aspects concerning the use of the Fund’s resources, the Executive Directors decide by way of clarification that Decision No. 71-2 does not preclude the use of the Fund’s resources for capital transfers in accordance with the provisions of the Articles, including Article VI.
Decision No. 1238-(61/43),
July 28, 1961
Use of Fund’s Resources: Meaning of “Consistent with the Provisions of This Agreement” in Article V, Section 3
The phrase “consistent with the provisions of this Agreement” in Article V, Section 3, means consistent both with the provisions of the Fund Agreement other than Article I and with the purposes of the Fund contained in Article I.
Decision No. 287-3,
March 17, 1948
Use of Fund’s Resources: Meaning of Article V, Section 3 (b)(ii)
The word “represents” in Article V, Section 3(a)(i),1 means “declares.” The member is presumed to have fulfilled the condition mentioned in Article V, Section 3(a)(i), if it declares that the currency is presently needed for making payments in that currency which are consistent with the provisions of the Agreement. But the Fund may, for good reasons, challenge the correctness of this declaration, on the grounds that the currency is not “presently needed” or because the currency is not needed for payment “in that currency,” or because the payments will not be “consistent with the provisions of this Agreement.” If the Fund concludes that a particular declaration is not correct, the Fund may postpone or reject the request, or accept it subject to conditions. The phrase “presently needed” cannot be defined in terms of a formula uniformly applicable to all cases, but where there is good reason to doubt that the currency is “presently needed,” the Fund will have to apply the phrase in each case in the light of all the circumstances.
Decision No. 284-4,
March 10, 1948
Guidelines on Conditionality
1. Basis and purpose of conditionality. Conditions on the use of Fund resources are governed by the Fund’s Articles of Agreement and implementing decisions of the Executive Board. Conditionality—that is, program-related conditions—is intended to ensure that Fund resources are provided to members to assist them in resolving their balance of payments problems in a manner that is consistent with the Fund’s Articles and that establishes adequate safeguards for the temporary use of the Fund’s resources.
2. Early warning and prevention. Conditionality is one element in a broad strategy for helping members strengthen their economic and financial policies. Through formal and informal consultations, multilateral surveillance including the World Economic Outlook and discussions of capital market developments, advice to members on the voluntary adoption of appropriate standards and codes, and the provision of technical assistance, the Fund encourages members to adopt sound economic and financial policies as a precaution against the emergence of balance of payments difficulties, or to take corrective measures at an early stage of the development of difficulties.
3. Ownership and capacity to implement programs. National ownership of sound economic and financial policies and an adequate administrative capacity are crucial for successful implementation of Fund-supported programs. In responding to members’ requests to use Fund resources and in setting program-related conditions, the Fund will be guided by the principle that the member has primary responsibility for the selection, design, and implementation of its economic and financial policies. The Fund will encourage members to seek to broaden and deepen the base of support for sound policies in order to enhance the likelihood of successful implementation.
4. Circumstances of members. In helping members to devise economic and financial programs, the Fund will pay due regard to the domestic social and political objectives, the economic priorities, and the circumstances of members, including the causes of their balance of payments problems and their administrative capacity to implement reforms. Conditionality and program design will also reflect the member’s circumstances and the provisions of the facility under which the Fund’s financing is being provided. The causes of balance of payments difficulties and the emphasis to be given to various program goals may differ among members, and the appropriate financing, the specification and sequencing of policy adjustments, and the time required to correct the problem will reflect those and other differences in circumstances. The member’s past performance in implementing economic and financial policies will be taken into account as one factor affecting conditionality, with due consideration to changes in circumstances that would indicate a break with past performance.
5. Approval of access to Fund resources. The Fund will ensure consistency in the application of policies relating to the use of its resources with a view to maintaining the uniform treatment of members. A member’s request to use Fund resources will be approved only if the Fund is satisfied that the member’s program is consistent with the Fund’s provisions and policies and that it will be carried out, and in particular that the member is sufficiently committed to implement the program. The Managing Director will be guided by these principles in making recommendations to the Executive Board with respect to the approval of the use of Fund resources by members.
6. Focus on program goals. Fund-supported programs should be directed primarily toward the following macroeconomic goals:
(a) solving the member’s balance of payments problem without recourse to measures destructive of national or international prosperity; and
(b) achieving medium-term external viability while fostering sustainable economic growth.
7. Scope of conditions. Program-related conditions governing the provision of Fund resources will be applied parsimoniously and will be consistent with the following principles:
(a) Conditions will be established only on the basis of those variables or measures that are reasonably within the member’s direct or indirect control and that are, generally, either (i) of critical importance for achieving the goals of the member’s program or for monitoring the implementation of the program, or (ii) necessary for the implementation of specific provisions of the Articles or policies adopted under them. In general, all variables or measures that meet these criteria will be established as conditions.
(b) Conditions will normally consist of macroeconomic variables and structural measures that are within the Fund’s core areas of responsibility. Variables and measures that are outside the Fund’s core areas of responsibility may also be established as conditions but may require more detailed explanation of their critical importance. The Fund’s core areas of responsibility in this context comprise: macroeconomic stabilization; monetary, fiscal, and exchange rate policies, including the underlying institutional arrangements and closely related structural measures; and financial system issues related to the functioning of both domestic and international financial markets.
(c) Program-related conditions may contemplate the member meeting particular targets or objectives (outcomes-based conditionality), or taking (or refraining from taking) particular actions (actions-based conditionality). The formulation of individual conditions will be based, in particular, upon the circumstances of the member.
8. Responsibility of the Fund for conditionality. The Fund is fully responsible for the establishment and monitoring of all conditions attached to the use of its resources. There will be no cross-conditionality, under which the use of the Fund’s resources would be directly subjected to the rules or decisions of other organizations. When establishing and monitoring conditions based on variables and measures that are not within its core areas of responsibility, the Fund will, to the fullest extent possible, draw on the advice of other multilateral institutions, particularly the World Bank. The application of a lead agency framework, such as between the Fund and the Bank, will be implemented flexibly to take account of the circumstances of members and the overlapping interests of the two institutions with respect to some aspects of members policies. The Fund’s policy advice, program design, and conditionality will, insofar as possible, be consistent and integrated with those of other international institutions within a coherent country-led framework. The roles of each institution, including any relevant conditionality, will be stated clearly in Fund-related program documents.
9. Nature of Fund arrangements. A Fund arrangement is a decision of the Executive Board by which a member is assured that it will be able to make purchases or receive disbursements from the Fund in accordance with the terms of the decision during a specified period and up to a specified amount. Fund arrangements are not international agreements and therefore language having a contractual connotation will be avoided in arrangements and in program documents. Appropriate consultation clauses will be incorporated in all arrangements.
10. Members program documents. The authorities policy intentions will be described in documents such as a Letter of Intent (LOI), or a Memorandum on Economic and Financial Policies (MEFP) that may be accompanied by a Technical Memorandum of Understanding (TMU). These documents will be prepared by the authorities, with the cooperation and assistance of the Fund staff, and will be submitted to the Managing Director for circulation to the Executive Board. The documents should reflect the authorities policy goals and strategies. In addition to conditions specified in these documents, members requesting the use of Fund resources may in exceptional cases communicate confidential policy understandings to the Fund in a side letter addressed to the Managing Director and disclosed to the Executive Board. In all their program documents, the authorities should clearly distinguish between the conditions on which the Fund’s financial support depends and other elements of the program. Detailed policy matrices covering the broader agenda should be avoided in program documents such as LOIs and MEFPs unless they are considered necessary by the authorities to express their policy intentions.
11. Monitoring of performance. The implementation of the member’s understandings with the Fund may be monitored, in particular, on the basis of prior actions, performance criteria, program and other reviews, and other variables and measures established as structural benchmarks or indicative targets.
(a) Prior actions. A member may be expected to adopt measures prior to the Fund’s approval of an arrangement, completion of a review, or the granting of a waiver with respect to a performance criterion when it is critical for the successful implementation of the program that such actions be taken to underpin the upfront implementation of important measures. In reaching understandings on prior actions, the Fund will also take into account the strain that excessive reliance upon such actions can place on members implementation capacity. The Managing Director will keep Executive Directors informed in an appropriate manner of the progress of discussions with the member.
(b) Performance criteria. A performance criterion is a variable or measure whose observance or implementation is established as a formal condition for the making of purchases or disbursements under a Fund arrangement. Performance criteria will apply to clearly-specified variables or measures that can be objectively monitored by the staff and are so critical for the achievement of the program goals or monitoring implementation that purchases or disbursements under the arrangement should be interrupted in cases of nonobservance. The number and content of performance criteria may vary because of the diversity of circumstances and institutional arrangements of members.
(c) Reviews. Reviews are conducted by the Executive Board.
(i) Program reviews. Program reviews provide a framework for an assessment of whether the program is broadly on track and whether modifications are necessary. A program review will be completed only if the Executive Board is satisfied, based on the member’s past performance and policy understandings for the future, that the program remains on track to achieve its objectives. In making this assessment, the Executive Board will take into consideration, in particular, the member’s observance of performance criteria, indicative targets, and structural benchmarks, and the need to safeguard Fund resources. The elements of a member’s program that will be taken into account for the completion of a review will be specified as fully and transparently as possible in the arrangement. Arrangements will provide for reviews to take place at a frequency appropriate to the member’s circumstances. Reviews are expected to be held every six months, but substantial uncertainties concerning major economic trends or policy implementation may warrant more frequent monitoring. In cases of major delays in the completion of a review, the Managing Director will inform Executive Directors in an appropriate manner.
(ii) Financing assurances reviews. Where the Fund is providing financial assistance to a member that has outstanding sovereign external payments arrears to private creditors or that, by virtue of the imposition of exchange controls, has outstanding non-sovereign external payments arrears, the Executive Board will conduct a financing assurances review to determine whether adequate safeguards remain in place for the further use of the Fund’s resources in the member’s circumstances and whether the member’s adjustment efforts are undermined by developments in creditor-debtor relations. More specifically, every purchase or disbursement made available after the approval of the arrangement will, while such arrears remain outstanding, be made subject to the completion of a financing assurances review. Financing assurances reviews may also be established where the member has outstanding arrears to official creditors.
(d) Other variables and measures. In monitoring the implementation of a member s program, the Fund may also examine variables and measures established as indicative targets and structural benchmarks. The same principles governing the scope of conditions set out in paragraph 7 apply to these variables and measures as well as to other program-related conditions.
(i) Indicative targets. Variables may be established as indicative targets for the part of an arrangement for which they cannot be established as performance criteria because of substantial uncertainty about economic trends. As uncertainty is reduced, these targets will normally be established as performance criteria, with appropriate modifications as necessary. Indicative targets may also be established in addition to performance criteria as quantitative indicators to assess the member’s progress in meeting the objectives of a program in the context of a program review.
(ii) Structural benchmarks. A measure may be established as a structural benchmark where it cannot be specified in terms that may be objectively monitored or where its non-implementation would not, by itself, warrant an interruption of purchases or disbursements under an arrangement. Structural benchmarks are intended to serve as clear markers in the assessment of progress in the implementation of critical structural reforms in the context of a program review.
12. Waivers. The Fund will grant a waiver for nonobservance of a performance criterion only if satisfied that, notwithstanding the nonobservance, the program will be successfully implemented, either because of the minor or temporary nature of the nonobservance or because of corrective actions taken by the authorities. The Fund will grant a waiver of the applicability of a performance criterion only if satisfied that, notwithstanding the unavailability of the information necessary to assess observance, the program will be successfully implemented and there is no clear evidence that the performance criterion will not be met.
13. Floating tranches. Conditions will normally apply to specified dates or continuously. However, when the Fund judges that the member will need to implement a particular structural measure or meet a particular performance target during the program period but not necessarily by a specific date, and when flexibility in timing would promote national ownership, the arrangement may provide for the purchase or disbursement of Fund resources to be made available whenever the measure is implemented or the target observed. These floating tranches are expected to apply primarily to structural performance criteria that are included because of their importance for medium-term external sustainability and growth.
C. Evaluation and Review
14. Program evaluation. The staff will prepare an analysis and assessment of the performance under programs supported by use of the Fund’s resources in connection with Article IV consultations and as appropriate in connection with further requests for use of the Fund’s resources.
15. Periodic review. The Fund will review the application of this Decision at intervals of five years and at such other times as consideration of it is placed on the agenda of the Executive Board.1 These reviews will evaluate the consistency of conditionality with these guidelines, the appropriateness and implementation of programs, and the effectiveness of policy instruments.
16. Decision No. 270-(53/95), adopted December 23, 1953, Stand-By Arrangements, as amended, Decision No. 6056-(79/38), adopted March 2, 1979, Guidelines on Conditionality, and Decision No. C-3220-(01/24), adopted March 9, 2001, Concluding Remarks by the Chairman—Conditionality in Fund-Supported Programs, are repealed. (SM/02/276, Rev. 1, 9/23/02)
Decision No. 12864-(02/102)
September 25, 2002,
as amended by Decision No. 13814-(06/98),
November 15, 2006
Side Letters and the Use of Fund Resources
1. The existence and content of side letters will be treated with the utmost confidentiality by management, Fund staff, and Executive Directors.
Definition of side letters
2. A side letter is a letter or other written communication from a member’s authorities to Fund management or staff containing confidential policy understandings complementary to or elaborating upon those in new or currently applicable letters of intent supporting a request for the use of Fund resources.
3. Understandings contained in side letters will not contradict or detract from those contained in the applicable letters of intent.
Use of side letters
4. Members requesting the use of Fund resources are encouraged to include all policy undertakings in letters of intent. Side letters will be used sparingly and only in those circumstances which the authorities consider, and management agrees, require such exceptional communication.
5. The use of side letters to keep certain understandings confidential can be justified only if their publication would directly undermine the authorities’ ability to implement the program or render implementation more costly. Accordingly, their use will normally be limited to cases in which the premature release of the information would cause adverse market reaction or undermine the authorities’ efforts to prepare the domestic groundwork for a measure.
6. While there is no presumption that particular kinds of measures would be conveyed in a side letter rather than a letter of intent, some matters that could in some cases be considered for inclusion in side letters would be: (i) exchange market intervention rules; (ii) bank closures; (iii) contingent fiscal measures; and (iv) measures affecting key prices.
Communication of side letters to the Executive Board
7. Fund staff will advise members’ authorities of this decision pertaining to the communication of side letters to the Executive Board before the authorities send side letters.
8. The Executive Board will consider any side letter in a restricted session soon after the relevant letter of intent is issued to the Board. At this session, each Executive Director’s constituency will be represented by only one person. A numbered copy of the side letter will be made available to each such representative and, at the end of the meeting, each copy will be returned. Staff will be present to answer any questions, including questions about the circumstances that justified the use of the side letter.
9. In principle, the full text of a side letter will be communicated to the Executive Board. However, at the request of the authorities, the Managing Director may delete from the copies to be communicated to the Board information of such specificity that:
- (i) it is substantially immaterial to Executive Directors’ consideration of the request for the use of Fund resources; and
- (ii) disclosure would: (a) seriously hamper the authorities’ capacity to conduct economic policy; or (b) confer an unfair market advantage upon persons not authorized to have knowledge of the information.
10. Information that might in specific cases be deleted under paragraph 9 above includes: figures regarding foreign exchange markets (e.g., exchange rate intervention triggers or amounts of intervention), names of specific banks or companies, or specific dates for the introduction of certain policy measures.
Communications about side letters by Executive Directors to members’ authorities
11. Executive Directors who decide to communicate information about a side letter to their respective authorities should: (i) limit the recipients to those who have a strict need to know; (ii) inform the recipients of the need to treat the information as highly confidential; and (iii) inform the recipients about the procedures that apply to the communication of side letters to the Executive Board under this decision.
12. Executive Directors that communicate information about a side letter to their respective authorities will inform promptly the Managing Director and the Executive Director for the member that sent the side letter of such communication.
13. This decision will be reviewed by the Executive Board within one year, provided, however, that it will be reviewed promptly before that time if the confidentiality of any side letter has not been observed.
Decision No. 12067-(99/108),
September 22, 1999
Summing Up by the Acting Chair—Review of Side Letters and the Use of Fund Resources Executive Board Meeting 02/59, June 12, 2002
Directors welcomed the review of side letters. They agreed that, in general, the policy on side letters has achieved its objective of enhancing accountability to the Board while at the same time the number of side letters had declined. Furthermore, the procedures set out in the side letters policy have maintained the confidentiality required by members’ authorities. Directors noted that the policy areas covered by side letters have appropriately focused on highly market-sensitive issues or understandings where premature release of information would undermine the authorities’ ability to implement their economic program or increase the costs of implementation. They also noted that resort to oral understandings between the Fund and national authorities has been rare, and should continue to be discouraged as such understandings lack transparency and are difficult to monitor. In the highly exceptional cases in which oral understandings would be used, the Board will be informed in an appropriate manner.
Directors stressed the need for systematic reporting to the Board on the implementation of understandings in side letters. In general, implementation will continue to be summarized in staff reports while maintaining the confidentiality of the original understanding, but information on the implementation of prior actions and performance criteria will, in all cases, be specifically reported to the Board. Some Directors suggested that this information be communicated to the Board in staff reports, which would be issued with a higher level of confidentiality than normal Board documents in cases where the information is still sensitive. However, most Directors agreed that, to better safeguard confidentiality, reporting to the Board on specific implementation of prior actions and performance criteria should follow the existing side letter procedures. Experience with the agreed reporting procedure will be monitored carefully and reviewed as appropriate.
Misreporting and Noncomplying Purchases in the General Resources Account—Guidelines on Corrective Action
In some cases, it has been found that a member has made a purchase in the General Resources Account that it was not entitled to make under the terms of the arrangement or other decisions governing the purchase (a “noncomplying purchase”). The purchase was permitted because, on the basis of the information available to it at the time, the Fund was satisfied that all performance criteria or other conditions applicable to the purchase under the terms of the relevant decision had been observed, but this information later proved to be incorrect. When such a case arises in the future, the member will be called upon to take corrective action regarding a noncomplying purchase, to the extent that it is still outstanding, either by repurchase or by the use of its currency in transactions and operations of the Fund, unless the Fund decides that the circumstances justify the member’s continued use of the purchased resources. Steps should also be taken to improve the accuracy and completeness of the information to be reported to the Fund by the member in connection with its use of the Fund’s general resources, and to define performance criteria and other applicable conditions in a manner that would facilitate accurate reporting. The Fund adopts the following guidelines, which shall apply to purchases made after the date of this decision:
1. Whenever evidence comes to the attention of the staff indicating that a performance criterion or other condition applicable to an outstanding purchase made in the General Resources Account may not have been observed, the Managing Director shall promptly inform the member concerned.
2. If, after consultation with the member, the Managing Director finds that, in fact, the performance criterion or other condition was not observed, the Managing Director shall promptly notify the member of this finding. At the same time, the Managing Director shall submit a report to the Executive Board together with recommendations.
3. In any case where the noncomplying purchase was made no more than four years prior to the date on which the Managing Director informed the member, as provided for in paragraph 1, the Executive Board may decide either (a) that the member shall be expected to repurchase from the Fund the outstanding amount of its currency resulting from the noncomplying purchase normally within a period of 30 days from the date of the Executive Board decision, or (b) that the nonobservance will be waived pursuant to paragraph 5.
4. Instead of repurchasing from the Fund the outstanding amount of its currency resulting from the noncomplying purchase as provided for in paragraph 3(a), the member may request the Fund to use an equivalent amount of its holdings of the member’s currency in the Fund’s transactions and operations, but if such use cannot be made within 20 days from the date of the Executive Board decision the member shall be expected to make a repurchase in accordance with paragraph 3(a).
5. A waiver under paragraph 3(b) will normally be granted only if the deviation from the relevant performance criterion or other condition was minor or temporary, or if, subsequent to the purchase, the member had adopted additional policy measures appropriate to achieve the objectives supported by the relevant decision.
6. If a repurchase pursuant to the expectation under paragraph 3(a) has not been effected, the Managing Director shall submit promptly a report to the Executive Board accompanied by a proposal on how to deal with this matter, in which the Managing Director may recommend that the Fund initiate action under Article V, Section 5 of the Articles.
7. Provision shall be made in Fund arrangements for the suspension of further purchases under an arrangement whenever a member fails to meet a repurchase expectation pursuant to these guidelines.
8. Nothing in these guidelines shall limit the power of the Fund to take, in cases of noncomplying purchases, other action that could be taken pursuant to the Fund’s Articles and Rules.
9. For the purposes of this decision:
- (i) whenever the Managing Director considers there is evidence indicating that a member may have made a noncomplying purchase, but the nonobservance of the relevant performance criterion or other specified condition was de minimis in nature, as defined in paragraph 1 of Decision No. 13849, the communication referred to in paragraph 1 may be made by a representative of the relevant Area Department;
- (ii) if the Managing Director determines that a member has made a noncomplying purchase and considers that the nonobservance of the relevant performance criterion or other specified condition was de minimis in nature, as defined in paragraph 1 of Decision No. 13849, the notification referred to in paragraph 2 may be made by a representative of the relevant Area Department, and the report of the Managing Director contemplated in paragraph 2 shall, wherever possible, be included in a staff report on the relevant member that deals with issues other than the noncomplying purchase and shall include a recommendation that the related nonobservance be considered to be de minimis in nature, and that a waiver for nonobservance be granted. In those rare cases when such a staff report cannot be issued to the Board promptly after the Managing Director concludes that a noncomplying purchase has been made, the Managing Director shall consult Executive Directors and, if deemed appropriate by the Managing Director, a stand-alone report on the noncomplying purchase will be prepared for consideration by the Executive Board, normally on a lapse-of-time basis; and
- (iii) whenever the Executive Board finds that a noncomplying purchase has been made but that the nonobservance of the relevant performance criterion or other specified condition was de minimis in nature as defined in paragraph 1 of Decision No. 13849, a waiver for nonobservance shall be granted by the Executive Board.
Decision No. 7842-(84/165),
November 16, 1984,
as amended by Decision Nos. 12249-(00/77), July 27, 2000,
December 20, 2006
Making the Misreporting Policies Less Onerous in De Minimis Cases
1. In order to address cases of misreporting that are considered to be de minimis in nature, the following amendments are hereby made to the decisions referred to below. To be considered de minimis, a deviation from a performance criterion, assessment criterion or other specified condition would be so small as to be trivial with no impact on the assessment of performance under the relevant member’s program, as illustrated by the examples set out in Table 1 of EBS/06/86.
Decision No. 13849-(06/108),
December 20, 2006
Establishment of General Policy to Condition Decisions in the General Resources Account on Accuracy of Information Regarding Implementation of Prior Actions
Any decision on the use of resources in the General Resources Account (including decisions approving an arrangement or an outright purchase, completing a review, or granting a waiver either of applicability or for the nonobservance of a performance criterion) will be made conditional upon the accuracy of information provided by the member regarding implementation of prior actions specified in the decision.
Decision No. 12250-(00/77),1
July 27, 2000
Establishment of General Policy to Condition Waiver Decisions in the General Resources Account on Accuracy of Information Regarding Performance Criteria
Any decision granting a waiver for the nonobservance of a performance criterion under an arrangement will be made conditional upon the accuracy of data or other information provided by the member to assess observance of the performance criterion in question.
Any decision waiving the applicability of a performance criterion under an arrangement will be made conditional upon (i) the accuracy of the member’s representation that the information necessary to assess observance of the relevant performance criterion is unavailable, and (ii) the accuracy of data provided by the member to assess observance of the same performance criterion for a preceding period (if applicable for that period).
Decision No. 12251-(00/77),
July 27, 2000
Summing Up by the Acting Chairman on Strengthening Safeguards on the Use of Fund Resources and Misreporting of Information to the Fund—Policies, Procedures, and Remedies—Preliminary Considerations1 Executive Board Meeting 00/32, March 23, 2000
Reliable information is essential to every aspect of the Fund’s work—surveillance, financing, and technical assistance—and is particularly important in ensuring that the Fund’s resources are used for their intended purposes. As has been the practice over many years, the Fund must depend primarily on trust in members’ readiness to provide the information needed and to use the Fund’s resources for the purposes envisaged.
While known incidents of misreporting and misuse of the Fund’s resources have been rare, many Directors noted recent instances involving allegations of misuse of Fund resources and cases of misreporting, and emphasized the importance of preserving the integrity of the Fund’s reputation as a careful and prudent provider of financial assistance to members. Directors agreed that these events further underscore the need to strengthen the Fund’s existing safeguards on the use of its resources.
The September 1999 Interim Committee emphasized the importance of strengthening governance at the national and international levels, and in this context called on the Fund to perform an authoritative review of its procedures and controls in order to identify ways to strengthen safeguards on the use of its funds and to report on this review at its next meeting.
In considering strengthened safeguards for the use of Fund resources, Directors noted the importance of the safeguards already in place, in particular program design, conditionality and monitoring, the availability of technical assistance, the transparency and governance initiatives, including the establishment and monitoring of codes and standards, and the recent use of special audits and the SDR-account mechanism in selected cases. They stressed that these areas of Fund operations should continue to play a central role in promoting public sector integrity and accountability, thereby contributing to the safeguarding of Fund resources. Directors also noted that policies on non-complying purchases are ex post in nature, in that they rely on the disincentives of actions taken by the Fund after the fact of misreporting has been established, and they welcomed this opportunity to review relevant aspects of the Fund’s legal framework governing misreporting of information to the Fund.
Directors also welcomed the opportunity to consider an approach to assessing the adequacy of member countries’ framework of safeguards that could help, ex ante, to prevent the possible misuse of Fund resources and misreporting of information. In considering the staff’s proposals, Directors expressed their gratitude to the panel of six eminent outside experts, drawn from the private and public sectors, who had independently assessed these proposals. In light of these proposals, the Board has decided on a number of steps to strengthen key aspects of the Fund’s framework for dealing with these issues.
Ex Ante Safeguards
Directors generally concurred that the proposed two-stage approach to safeguards assessments could provide an appropriate mechanism to strengthen existing safeguards by assessing a central bank’s compliance with a series of desirable practices, rules and regulations regarding internal control procedures, financial reporting, and audit mechanisms. Safeguards assessments of central banks have the objective of providing reasonable assurance to the Fund that the central bank’s control, accounting, reporting, and auditing systems in place to manage resources, including Fund disbursements, are adequate to ensure the integrity of operations. However, Directors remarked that safeguards assessments would not prevent misuse of resources by a willful override of controls or manipulation of data. They noted the view of the panel of experts that safeguards assessments will greatly enhance the ability of central banks to improve their controls, efficiency, and effectiveness, as well as their view that the assessment framework addresses the protection of member shareholders’ resources without threatening the cooperative nature of the Fund.
Directors generally endorsed the framework for the conduct of safeguards assessments and, in particular, the focus on member countries’ central banks. They agreed that the safeguards framework would include an assessment of the accountability and transparency of foreign reserves management operations assumed by agencies outside the central bank, which is sometimes the case when the fiscal agent for the Fund is not the central bank. Some Directors, however, emphasized the importance of strengthening controls and financial reporting in the government sector, and took note, in this regard, especially of the need to strengthen the quality and reliability of fiscal data and of other information related to performance criteria used in Fund-supported programs. They noted management’s intention to strengthen the approach to handling data in the Fund, to which I will refer later.
Directors endorsed the proposal that an important principle of the strengthened safeguards framework become a standard requirement for Fund financial support, namely, that central banks of member countries making use of Fund resources publish annual financial statements independently audited by auditors external to the central banks in accordance with internationally accepted audit standards. In noting their agreement with the staff proposal on external audits based on international quality standards, several Directors underscored the importance of sound risk and reserve management practices, including transactions on an arm’s length basis with related parties. They also endorsed the general principle of basing benchmarks on the Fund’s Code of Good Practices on Transparency in Monetary and Financial Policies.
A number of Directors noted that, although they agree in principle with the staff’s proposals, country-specific circumstances would need to be taken into account in the conduct of safeguards assessments. In this context, Directors stressed the importance of technical assistance in the implementation of recommendations arising from the safeguards assessments.
In the first stage of the assessment process, the authorities of a member seeking a new Fund arrangement would be expected to furnish the Fund with the documents listed in the attachment to this summing up as early as possible, and grant permission for Fund staff to hold discussions with their independent auditors. The staff would review this information to arrive at a preliminary judgment about the adequacy of the central bank’s internal control systems, reporting, and internal and external audit mechanisms.
Directors supported the view that if, based on this information, the staff reaches the conclusion that the central bank’s control, reporting, and auditing mechanisms appeared adequate for safeguarding Fund resources, no further steps would be undertaken. In other cases, and as a second stage, an on-site review would be undertaken by a multidisciplinary team prior to presentation of the arrangement for Board approval, or in any case no later than the first review.
On the modalities of this second stage, Directors considered that multidisciplinary teams were needed, including experts from central banks and private accounting firms. They generally concurred that the teams should be led by the staff to ensure consistency of the approach and to help achieve a continuous improvement of the assessment methodology. Directors emphasized the importance of confidentiality and the need for close monitoring and guidance of outside experts. They also recognized the confidential nature of safeguards assessment reports and, in this regard, generally agreed that the results of safeguards assessments be made available to the Executive Board in a summary form. At the same time, if requested by Board members, information referred to in the summary reports would be made more fully available by management to the Executive Board in an appropriate format and forum.
Directors considered that the introduction of safeguards assessments requires a differentiation between new and current users of Fund resources. For Fund arrangements approved after June 30, 2000, two requirements would be applied: (i) member countries’ central banks would be subject to the two-stage assessment approach described above, with the expectation that in many cases the first stage would suffice, and (ii) as part of the safeguards, central banks would publish annual financial statements independently audited by auditors external to the central banks in accordance with internationally accepted audit standards.
For Fund arrangements in effect before June 30, 2000, Directors endorsed the view that, as a transitional arrangement to minimize resource costs, the two-stage assessment approach would not be applied. However, an important part of the safeguards framework would apply—the audit arrangements in place at central banks would be assessed to determine whether the central banks publish annual financial statements independently audited by auditors external to the central banks in accordance with internationally accepted audit standards. Members with possible disbursements subject to program reviews after September 30, 2000 would be required to furnish the Fund with the documents listed in points (1) to (3) of the attachment three months before the first program review after September 30, 2000. The staff would review this information to assess the adequacy of the external audit arrangements and report its findings to management. Where improvements were deemed necessary, these and the authorities’ response would be reported to the Board in the documentation for the first program review after September 30, 2000.
The resource implications of safeguards assessments would be kept under review and Directors noted management’s intention to return to the Board should the resource requirements exceed those available under the Fund’s current fiscal year 2001 budget proposals.
Most Directors expressed the view that safeguards assessments should be carried out on an experimental basis and that a review of the Fund’s experience with this approach should be undertaken with the involvement of the outside panel of experts within 12–18 months.
List of Information/Documents to Obtain from Member Country Central Banks
1. Copies of audited (or unaudited if no audit is performed) financial statements for the past three years, together with related audit reports.
2. Copies of all management letters issued by the external auditors in connection with their audit of the financial statements for the past three years.
3. Copies of all audit reports (including agreed-upon procedures engagements) issued by the external auditors during the past three years.
4. A description of the central bank’s management structure, including the organizational reporting structure.
5. A description of the organizational structure and reporting lines of the internal audit department, including details of the senior management staff in the department and a summary of staff resources (experience and qualifications).
6. A summary of high-level internal controls in place for the banking, accounting, and foreign exchange departments of the central bank.
7. Listing of all reports issued by the internal audit department in the past three years and a summary description of findings. Potentially, copies of reports dealing with operational and financial controls during the same period.
8. Details of the full legal names of any subsidiaries of the central bank, and a description of their business and the nature of their relationship with the central bank. A listing of all correspondent banks.
9. A listing of all accounts held by government agencies with the central bank.
10. Copies of current legislation governing the central bank.
Failure to Meet a Repurchase Expectation and Use of Fund’s General Resources Executive Board Meeting 85/26, February 20, 1985
The Executive Board agreed … that, if a member were failing to meet a repurchase expectation pursuant to the Guidelines on Corrective Action with respect to a noncomplying purchase, the Fund would not negotiate or approve either a stand-by or extended arrangement for the member or the use of the Fund’s general resources outside an arrangement, as in the case of an overdue financial obligation to the Fund.
Overdue Financial Obligations—Amended Decisions
1. References in Fund decisions to Decision No. 7842-(84/165) on the guidelines on corrective action in cases of misreporting and noncomplying purchases in the General Resources Account shall be understood to be references to Decision No. 12249-(00/77), July 27, 2000.
2. Decision No. 7931-(85/41), March 13, 1985, and Decision No. 7999-(85/90), June 5, 1985 are hereby abrogated. (EBS/01/122, 7/23/01)
Decision No. 12548-(01/84),
August 22, 2001
The Acting Chair’s Summing Up—Safeguards Assessments—Review of Experience and Next Steps Executive Board Meeting 02/26, March 14, 2002
Directors considered the safeguards policy, which was adopted on an experimental basis in March 2000 as an ex ante mechanism to strengthen the IMF’s framework of measures to safeguard the use of Fund resources and minimize the possibility for misreporting, to be an unqualified success. The policy has been widely accepted by central banks, and has helped improve their operations and accounting procedures while enhancing the Fund’s reputation and credibility as a prudent lender. Directors, therefore, supported the staff proposal that the policy be adopted as a permanent feature of Fund operations. They expressed their gratitude to the panel of experts for their contribution in shaping the safeguards policy.
Despite improvements in central banks’ safeguards over the past few years, Directors noted that the safeguards assessments completed to date have revealed significant vulnerabilities in the controls employed by a number of central banks of borrowing member countries, which could lead to possible misreporting to the Fund or misuse of central bank resources, including Fund disbursements. In particular, safeguards assessments have revealed that (i) a substantial number of central banks’ financial statements are not subject to an independent and external audit conducted in accordance with internationally accepted standards; (ii) several central banks have poor controls over foreign reserves and data reporting to the IMF; and (iii) a number of central banks have adopted an unclear financial reporting framework and inadequate accounting standards.
Directors noted that these findings indicated that significant, but avoidable, risks to Fund resources may exist in the cases concerned. Accordingly, some of the findings have warranted corrective measures under program conditionality, ranging from prior actions to policy commitments in letters of intent. Directors stressed, however, that Fund conditionality in these cases should be limited to areas highly relevant to safeguarding the use of Fund resources. They welcomed the fact that central banks have generally embraced the staff recommendations and that many have already taken steps to implement them. Directors advised the staff to tailor the assessments and remedial measures to the specific circumstances of individual countries.
Directors agreed that the coverage of safeguards assessments should extend to countries that augment an existing Fund arrangement or that have a Rights Accumulation Program, and a number favored its extension to countries with stand-alone CFFs and to countries with outstanding obligations to the Fund that do not currently have a Fund-supported program. Some Directors also favored its extension to countries with staff-monitored (SMPs), but others felt otherwise since these cases do not involve the use of Fund resources. Most Directors agreed that countries under an SMP should be encouraged to undergo safeguards assessments on a voluntary basis, as in many cases these programs are followed by formal arrangements with the Fund. While recognizing that the safeguards assessments constitute part of the Fund’s broader efforts to improve transparency in member countries, Directors stressed that safeguards assessments should not be converted to an institution-building exercise, but should remain narrowly focused on safeguarding use of Fund resources. Most Directors agreed that safeguards assessments should not be applied to fiscal issues and other public agencies, since that would require a new mandate for the staff. A few Directors also urged the staff to raise safeguards issues in the context of Article IV consultations with countries that were not subject to a safeguards assessment, but have current outstanding obligations to the Fund.
Moving forward, Directors supported the shift of focus of the safeguards policy, during the next three or four years, from initial assessments to the monitoring of past commitments. They welcomed the improvements to external communications during the safeguards process proposed by the staff, and the closer coordination of corrective actions with past and ongoing technical assistance. Directors also underscored the need to strengthen internal communications among Fund staff to ensure consistency in the application of the safeguards policy.
Directors stressed that a key consideration moving forward is the modalities for monitoring the implementation of the remedies proposed by safeguards assessments. They noted that commitments made by the authorities to implement safeguards recommendations would be monitored in conjunction with overall program conditionality and that the main focus of future safeguards work would, therefore, be on the efficacy of implementation. To facilitate the monitoring of recommendations, Directors agreed that central banks should provide annually to Fund staff their annual audited financial statements and related audit reports, including management letters and special audit reports, for as long as Fund credit remains outstanding. They also agreed that the periodicity of monitoring would be influenced by the timing for implementing past recommendations and that, in some cases, on-site monitoring would be necessary.
Directors agreed that the modalities for future safeguards assessments would be broadly similar to existing procedures, except for improvements resulting from the lessons learned during the experimental period to narrow the focus and improve the effectiveness of the assessment. Therefore, all member countries receiving a new arrangement from the IMF after June 30, 2000, would be subject to a full safeguards assessment. However, the nature and extent of a safeguards assessment for new arrangements where a previous assessment had already been conducted would be based on known risk factors, including the findings and date of the previous assessment, the results of the safeguards monitoring process, and possible new developments at the central bank. Also, the distinction between Stage One (off-site) and Stage Two (on-site) assessment reports would no longer apply—a single, confidential safeguards assessment report would be prepared for all new arrangements.
Directors noted the importance of deadlines for the completion of safeguards assessments and indicated that, in principle, the assessment should be completed prior to the Executive Board’s approval of a new arrangement. They recognized, however, that various factors may delay the completion of a safeguards assessment and agreed to retain the deadline for completion of the assessment by no later than the first program review under the arrangement. Where the deadline is not met, either due to external factors or as a result of deliberate recommendation by the staff, Directors noted that a staff report recommending completion of a review under the arrangement would contain, in the appraisal, an explicit statement to this effect and the reasons for proposing completion of the review despite the delay in the safeguards assessment. Several Directors suggested that the current policy be augmented so that key weaknesses are addressed as soon as possible and prior to the second review under any program, although the administrative capacity of the country must be taken into account. In view of the importance of safeguards assessments to the integrity of the Fund and the benefits to members, and to minimize delays, many Directors supported the allocation of more staff resources to this task, although a number of them preferred that this be done through redeployment. Some Directors also encouraged the continued use of technical experts from central banks.
Directors concurred that safeguards assessment reports should remain confidential documents and requested that the Executive Board be kept informed on safeguards issues by (i) a summary of findings and recommendations identified by safeguards assessments in staff reports; and (ii) periodic summary reports to the Executive Board on safeguards assessments findings in general. However, a few Directors believed that countries that wish to publish their reports should be allowed to do so. Directors supported publication of the staff report after deletion of references to individual countries. They agreed that a review of the safeguards policy should take place in three years, if not earlier,1 and suggested the involvement of external experts in the review process.
Summing Up by the Chairman—Emergency Financing Mechanism Executive Board Meeting 95/85, September 12, 1995
Directors welcomed the opportunity to consider the elements of a proposed “emergency financing mechanism” (EFM) which would strengthen the ability of the Fund to respond rapidly in support of members facing a crisis in their external accounts and seeking Fund assistance. Although the wording “emergency financing mechanism” suggests a more ambitious purpose, Directors in fact considered that the topic under discussion was an emergency procedure rather than a new financing mechanism.
Directors agreed that the essence of an emergency financing mechanism was to provide for exceptional procedures that, in the event a member faced a crisis, would facilitate rapid approval of Fund support while assuring the conditionality necessary to warrant such support. In this connection, Directors generally agreed that there was not necessarily a link between exceptional procedures to facilitate a rapid response on the part of the Fund, on the one hand, and exceptional access, or the need for supplementary financing, on the other. However, Directors noted that, in addition to a rapid response to an emergency, the Fund may need to provide potentially large and front-loaded access, which possibly would imply the need to call upon the supplementary resources. Issues related to possible expansion of the GAB and/or the supplementary borrowing arrangements, and their modalities and criteria for activation, remain open for further consideration, and we may need to return to the question of linkages to the EFM as those discussions evolve. For the moment, however, I believe there is broad agreement among Directors on the main aspects of what would constitute emergency procedures.
While noting the staff’s assurances regarding “moral hazard” and other issues raised during the Board discussion of the role of the Fund in August, most Directors stressed the importance of ensuring that the use of the emergency procedures would be limited to truly exceptional circumstances and that the Fund’s role, in the context of such use, would remain catalytic. Further, use of emergency procedures would not be a guarantee against sovereign default. With regard to the key features of these emergency procedures, many Directors underscored the critical importance of strengthened Fund surveillance, and close cooperation between the Fund and the members, in order to help avoid a financial crisis and to facilitate a rapid response should a crisis occur. In that context, it was stressed by several Directors that it was a member’s responsibility to come to the Fund early with a strong and comprehensive economic program in order to prevent a potential crisis from emerging and to limit the cost of repair.
There was very broad support for the circumstances and conditions under which emergency financing procedures could be initiated, and for the procedures themselves, as suggested and clarified by the staff. Some Directors expressed concern about the lack of objective criteria to identify in advance what kind of financial crisis would require and warrant a rapid Fund response, but others noted that it would be difficult to define beforehand the characteristics that would constitute such a crisis. A number of Directors would prefer to limit the use of emergency procedures to situations involving significant spillover or contagion effects, but most noted that such an approach would unduly restrict the availability of emergency procedures. Some Directors pointed to the lack of consensus on the meaning, in particular, of the concept of systemic effects.
In their comments, a number of Directors have emphasized the importance of continuous and substantive involvement of the Executive Board in the utilization of emergency procedures. I fully agree and have assured you that management would inform the Board immediately of its intention to activate the emergency procedures. Close communication and consultation would be maintained throughout the process, about which I will have more to say later in this summing up, and I agree on the importance of ensuring early and broad-based support in any activation of emergency procedures.
With reference to the specific elements of emergency procedures, I would list them as follows so that there is clarity for members, the staff, management, and the Board.
• The emergency procedures would be expected to be used only in rare circumstances that represented or threatened to give rise to a crisis in a member’s external accounts requiring immediate response from the Fund. Identification of such an emergency would be based on an initial judgment by management, in consultation with the Executive Board, that the member was faced with a truly exceptional situation threatening its financial stability, and that a rapid Fund response in support of strong policies was needed to forestall or to contain significant damage to the country itself or to the international monetary system, it being understood that the potential for spillover effects would be an important element of the Board’s final judgment.
• The conditions for activation of emergency procedures would include the readiness of the member to engage immediately in accelerated negotiations with the Fund, with the prospect of early agreement on—and implementation of measures sufficiently strong to address the problem. Prior actions normally would be expected. The member’s past cooperation with the Fund, in particular its record of reporting and responding to the Fund’s policy advice in the context of regular consultations and continuing surveillance, would have a strong bearing on the speed with which the Fund itself could assess the situation and agree on necessary corrective measures. Our important operating principle—the stronger the program, the stronger the Fund’s support would also apply here.
• The Executive Board would be informed immediately by management of the intention to activate emergency procedures, the nature of the emergency and the initial outlines of the planned responses by the member and the Fund, and the likely timetable for Executive Board discussion of a proposed arrangement. Strict confidentiality would need to be maintained, and public statements should be careful not to prejudge the Board’s exercise of its responsibility to take the final decision.
• A short written report would be circulated to the Executive Board as soon as feasible, describing the member’s current economic situation.
• During the negotiations with the member, the Executive Board would be briefed regularly on economic and financial developments, the progress of negotiations, the likely key parameters of the program (including the level and phasing of access), the likely impact on the Fund’s liquidity and the possible need to activate borrowing arrangements, and any changes in the initially envisaged timetable for Executive Board discussion of the arrangement. These briefings would provide the Board with opportunity to give guidance to management and the staff on the country’s policies and the contemplated Fund assistance.
• In instances where support from other creditors is likely to be important, consultations with key creditors would be initiated at the outset of the emergency. The Executive Board would be informed of relevant developments in this area, in the context of the regular informal briefings.
• Once agreement had been reached on a program, documents would be circulated as soon as possible. The staff would aim to do this within, say, five days. The Executive Board would be prepared to consider the request for an arrangement as early as 48 to 72 hours after circulation of the documentation. Decisions regarding key parameters, including access and phasing, would be taken in the context of the Executive Board’s consideration of the arrangement, in accordance with the existing rules and practices of the Fund.
• The early involvement and high frequency briefing of the Executive Board would be a centerpiece of the procedures facilitating a rapid Fund response. Similarly, after approval of the arrangement, and during a period of very close monitoring by the staff to allow early and continuing assessment of the effectiveness of the member’s policy response, the Executive Board would continue to be involved closely in monitoring progress until the emergency was definitively resolved. In most cases, it could be expected that the full review of the initial policy response and the reaction of markets to these policies would be conducted within one to two months of the approval of the arrangement, with the aim of allowing modifications to policies as necessary in light of the evolving situation.
• Directors agreed that there would be an understanding, rather than a legal obligation, that the member would make early repurchase of the resources made available under emergency procedures, provided the member overcame its crisis quickly.
I conclude from today’s meeting that Directors agree that we should strengthen the Fund’s ability to act quickly in crisis situations. Directors have endorsed the broad outlines of the proposed features of what could constitute emergency procedures. I will plan to report to the Interim Committee on this basis. Of course, there are issues related to supplementary financing arrangements still under discussion, and we will consider any implications of such arrangements for the emergency financing mechanism in due course.
1. If outstanding credit to a member from the Fund’s General Resources Account (GRA), or from the Fund as Trustee of the Poverty Reduction and Growth Facility Trust (PRGF Trust), or a combination thereof, exceeds a threshold of 100 percent of quota, and the member does not have a program supported by a Fund arrangement or is not implementing a staff monitored program with reports issued to the Executive Board, or the member does not have a program supported by a Policy Support Instrument (“PSI”), the member will be expected to engage in Post-Program Monitoring (PPM) with the Fund of its economic developments and policies upon the recommendation of the Managing Director, provided that, for the purposes of calculating the member’s outstanding Fund credit, purchases under the Short-Term Liquidity Facility shall not be counted. Where the above criteria are met, the Managing Director shall recommend PPM to the Executive Board, unless, in the view of the Managing Director, the member’s circumstances (in particular, the strength of the member’s policies, its external position, or the fact that a successor arrangement or a staff monitored program is expected to be in place within the next six months) are such that the process is unwarranted. PPM will normally cease when the member’s outstanding credit falls below the threshold of 100 percent of quota.
2. The Managing Director may also propose PPM to the Executive Board in cases where outstanding credit as defined above is below the above-specified threshold if, in the view of the Managing Director, there are developments that suggest the need of such a process, particularly, where developments call into question the member’s progress toward external viability.
3. For members subject to PPM, there will normally be two PPM Board discussions in a twelve-month period. One such discussion will normally coincide with the Article IV consultation. The member will be expected to engage in discussions with staff on its policies, which shall include a quantified macroeconomic framework. The staff will report to the Executive Board on the member’s policies, the consistency of the macroeconomic framework with the objective of medium-term viability, and the implications for the member’s capacity to repay the Fund.
4. The Executive Board’s discussion of a PPM paper will be reflected in a Public Information Notice (PIN). The publication of the PIN will follow the normal PIN procedure, including the requirement of the member’s consent.
Decision No. 13454-(05/26),
March 14, 2005,
as amended by Decision Nos. 13563-(05/85), October 5, 2005, and
October 29, 2008
The Acting Chair’s Summing Up—Conclusions of the Task Force on Prolonged Use of Fund Resources Executive Board Meeting 03/28, March 24, 2003
Directors supported a strengthening of the IMF’s “due diligence” in cases of prolonged use, through systematic ex post assessment and strategic forward planning in the context of Article IV surveillance. An interdepartmental staff team will prepare such an assessment and planning exercise prior to the Article IV consultation mission to a country identified as a prolonged user. The assessment will reflect input from the World Bank and, in some cases, might also draw on outside experts. The exercise will cover an analysis of the economic problems facing the country, a critical and frank review of progress during the period of Fund-supported programs, and a forward-looking assessment that takes into account lessons learned and presents a strategy for future Fund engagement. Where appropriate, the assessment will present an explicit “exit strategy;” some Directors expected this to be the normal procedure. This strategy may include, in some cases, an approach to help countries identify the steps to be taken to widen their options for external financing, for example by fostering access to foreign direct investment or to international capital markets. Following the consultation discussions with the authorities, the results of this exercise will be presented to the Executive Board in the Article IV staff report. Directors considered that such an approach could also prove useful in the case of some countries that were not identified as prolonged users. In addition, the staff report for the final review under any Fund-supported program will include a concise description of the degree to which the program has achieved its initial objectives. A few Directors also called for further consideration of how best to ensure effective Board discussions of country cases where programs appear to be off-track and an Article IV Consultation is not scheduled.
Most Directors saw the definition of prolonged use proposed by the task force and building on the IEO’s recommendations as an appropriate way to identify countries for the process of ex post assessments and strategic planning. A country will be considered a prolonged user when it has spent 7 or more of the last 10 years under upper credit tranche stand-by or extended arrangements including precautionary arrangements, or a mix of GRA and PRGF or ESAF resources. Most Directors also supported the proposal that, for countries using the Fund’s concessional resources, the new assessment process be triggered when a country has gone through two or more multi-year arrangements under the PRGF or ESAF (through either completion of the arrangements, or expiration without making all of the scheduled purchases, or cancellation). Some Directors would have preferred to come back to this issue on the occasion of the forthcoming discussion of the Fund’s role in low-income countries. Directors emphasized that the inclusion of a country in this new process should not be viewed as an indication of program failure, and that, in each case, the staff will need to be clear about its assessment of program implementation and achievements. A number of Directors considered that precautionary arrangements should be excluded from the definition of prolonged use. Directors agreed to a gradual phasing in of the new assessment process in line with the existing staff resource envelope, particularly in the case of low-income countries.
The Acting Chair’s Summing Up—Review of Ex Post Assessments and Issues Related to the Policy on Longer-Term Program Engagement Executive Board Meeting 06/46, May 15, 2006
Executive Directors welcomed the first opportunity to review the policy on Longer- Term Program Engagement (LTPE) in light of the experience gained since its introduction in 2003. As highlighted in the Report of the Independent Evaluation Office (IEO) on Prolonged Use of Fund Resources, in some cases, LTPE may signal that there has been inadequate progress in dealing with members’ economic problems, and that LTPE might hinder the development of domestic institutions and could adversely affect the Fund’s credibility, as well as the availability of its resources to support other members. At the same time, LTPE could be appropriate under certain circumstances, particularly when economic and structural problems are deep-seated and require many years to resolve.
Directors noted that ex post assessments (EPAs) have become an integral component of the Fund’s overall strategy to minimize inappropriate LTPE. Underpinned by an explicit definition of LTPE, EPAs strengthen the Fund’s due diligence for members identified as having long-term program relationships with the Fund. In addition to EPAs, Directors emphasized that sound program design and well-specified, targeted conditionality are key elements in ensuring that Fund-supported arrangements can meet their objectives. Effective surveillance, access policy, the Fund’s charge structure, and early repurchase policies all have a role to play in ensuring the revolving character of Fund resources.
Directors welcomed the recent decline in the incidence of LTPE among countries using GRA resources. While this reflects partly the positive worldwide economic conditions, Fund policies are also an important contributing factor. Directors observed that the large majority of members having LTPE are low-income countries—where LTPE has been the norm rather than the exception. Although this should not necessarily be perceived as a serious problem, given the long-term needs of these countries for Fund support in undertaking macroeconomic and structural adjustments, Directors stressed the importance of ensuring that both GRA and PRGF resources are used in the most effective manner.
Directors had a fruitful discussion of the summary findings from the 32 EPA reports included in the exercise. They took note that, in most cases, EPAs found that the design of policies in Fund-supported programs had been consistent with the multiple macroeconomic and structural challenges that LTPE members faced, and that Fund involvement had not undermined members’ institutional development. Directors noted, however, that several EPAs had been critical of the design of structural reforms, in terms of both the scope and the number of structural conditions. They underscored that, notwithstanding recent progress, efforts should continue to streamline conditionality, focusing on measures that are critical to the program’s success. They emphasized that one of the key priorities of EPAs is to draw lessons on program design, including the appropriate balance between adjustment and financing, to help guide future Fund engagement. Directors also noted that issues related to ownership and Bank-Fund collaboration remain important factors affecting program implementation.
Directors considered that, by and large, EPAs have served their purpose and have delivered balanced reflections on the Fund’s longer-term program relations with its members, explaining the macroeconomic and structural issues that confronted members over the review period, and presenting a medium-term policy program and a plan for continued Fund engagement. Directors took note that country authorities, with a few exceptions, thought that EPAs described past policies and programs accurately, drew the right conclusions, and provided valuable lessons for future policies.
Noting that EPAs remain an important institutional mechanism to distill lessons and to enhance the learning culture of the Fund, Directors supported continuing the practice of preparing them. They nevertheless saw scope for some operational modifications, with a view to enhancing their quality, credibility, and effectiveness as a policy tool for the Fund and to improving their usefulness for country authorities, while at the same time streamlining the process. Directors noted that EPAs enable the staff, management, and the Executive Board to step back from the more immediate demands of program operations and assess the effectiveness of the Fund’s program engagement. However, their quality and effectiveness have been uneven. Directors agreed that the value of EPA reports could be enhanced by better selectivity and focus on a few critical issues. This would improve the analytical content of the reports and also shorten them. Directors also suggested that systematic discussions in EPAs of the reasons for program success or failure and of potential exit strategies would provide further useful lessons. They generally agreed that, the Fund’s budget situation permitting, the staff should expand efforts to reach out and consult with donors, outside experts, and country authorities, taking account of the specific country situation. In this context, consideration could be given to allowing the EPA-team leader to visit the country before the report is finalized on a need basis, and, in selected cases, to hiring an external consultant, while safeguarding the confidentiality of information.
Directors generally supported the proposed two changes in the definition of LTPE. First, Directors agreed that, to ensure uniform treatment of members, the definition of LTPE should be unified for PRGF and GRA users: members will qualify as having LTPE if they have spent seven out of ten years under Fund-supported programs. Second, Directors broadly agreed that time spent under precautionary arrangements that remain undrawn would not count toward LTPE, parallel to the treatment of members using the Policy Support Instrument. They considered that most precautionary arrangements have been used to signal authorities’ commitment to a strong policy framework; being defined as having LTPE may undermine that signal. Directors agreed that, if the member draws upon a precautionary arrangement, then the period during which the arrangement is effective would count toward LTPE. The view was expressed, however, that precautionary arrangements constitute contingent liabilities and, if repeated and prolonged, raise issues regarding the revolving character of the Fund’s resources.
Noting that the preparation of EPAs had been more resource intensive than originally expected, Directors discussed steps to increase their cost effectiveness. They considered that frequent EPAs on a single country are less likely to offer new insights, and therefore supported introducing an interval of at least five years between EPAs, with a few regarding this as a benchmark rather than a rule. Reducing the size of an EPA team was also suggested as another cost-saving measure.
Directors emphasized the important role EPAs should play in providing an independent and fresh perspective on Fund operations in program countries. Most Directors considered that EPAs should be a stand-alone document, prepared by an interdepartmental team, and that the team should be led by a mission chief from a department other than the home area department, while being mindful of the need to contain the cost of the overall EPA process. These Directors viewed this approach as providing the greatest insights into program design and enhancing the independence of EPAs—a view supported by empirical evidence. However, a number of Directors, pointing to the potential cost saving, agreed with the staff proposal to give discretion to area departments and management to decide whether to prepare stand-alone EPA reports—where a reassessment of policies is needed—or to merge them with Article IV or program review reports—where Fund-supported programs have largely achieved their objectives.
Based on this discussion, the staff will prepare revised guidelines for implementation of the policy on longer-term program engagement. These guidelines will be circulated to the Board in due course.
Credit Tranche Policies, Stand-By Arrangements, Extended Fund Facility, and Extended Arrangements
1. Access to Fund resources in the credit tranches will normally be provided through a stand-by arrangement.
2. A representation of need by a member for a purchase requested under a stand-by arrangement will not be challenged by the Fund.
3. The normal period for a stand-by arrangement will range from 12 to 18 months. If a longer period is requested by a member and is considered necessary by the Fund to enable the member to implement its adjustment program successfully, the stand-by arrangement may extend beyond this range, up to a maximum of three years.
4. Phasing and performance clauses will be omitted in stand-by arrangements within the first credit tranche. They will be included in all other stand-by arrangements but will apply only to purchases outside the first credit tranche. For an arrangement within the first credit tranche, a member may be required to describe the general policies it plans to pursue, including its intention to avoid introducing or intensifying exchange and trade restrictions.
Decision No. 12865-(02/102),
September 25, 2002
General Policies on Use of the Fund’s Resources: Tranche Policies
The Fund’s attitude to requests for transactions within the “first credit tranche”… is a liberal one, provided that the member itself is making reasonable efforts to solve its problems. Requests for transactions beyond these limits require substantial justification.
Annual Report of the Executive Directors,
1963, page 161
Summing Up by the Acting Chair—Lessons from the Real-Time Assessments of Structural Conditionality Executive Board Meeting 02/36, April 3, 2002
Executive Directors welcomed the opportunity to take stock of the ongoing review of conditionality by reviewing recent experience with the interim guidelines that have been in effect since September 2000. They generally agreed that this experience is broadly positive, while pointing to some areas where implementation could be further strengthened. The central objectives of the review—streamlining and focusing conditionality on measures that are critical for achieving the program objectives, and fostering national ownership of Fund-supported programs for the purpose of enhancing the success and effectiveness of programs—continue to serve as useful benchmarks for assessing progress and for gleaning lessons from the application of conditionality in a variety of cases.
Directors reaffirmed that the purpose of streamlining conditionality is to enhance the success and effectiveness of programs by concentrating on those conditions that are critical to achieving the program’s macroeconomic objectives. Directors welcomed the increased focus of conditionality on the core areas of fiscal, financial, and exchange rate policies, and stressed in particular the importance of retaining structural conditions in the fiscal domain, especially on improving expenditure management and enhancing revenue performance. Financial sector conditions, centered on strengthened supervision, were also seen as important, with real-time assessments highlighting the need to ensure that such measures are internally consistent and aimed at an overall strengthening of the financial system.
Directors agreed that some structural conditionality will likely remain necessary outside the Fund’s core areas, when justified by the magnitude of its impact on the fiscal and external balances. In this context, they noted that measures in a variety of areas, such as privatization, governance, and public enterprise and civil service reform, had been covered by Fund conditionality, based on their critical impact on restoring the soundness of a country’s public finances. Against this background, a number of Directors saw scope for further streamlining, especially in non-core areas, but a member of other Directors considered it to be preferable to err on the side of caution to ensure that all important measures are adequately covered. In discussing how best to balance the need for inclusion of critical conditionality in non-core areas with the goal of parsimony, Directors stressed that the reasons for including structural conditionality beyond the Fund’s core areas should be clearly explained and clearly justified in every case in relation to the goals of the program, while noting that these goals may vary from one case to the next.
In this context, Directors agreed that, in PRGF arrangements, structural measures oriented primarily toward achieving growth and poverty reduction objectives can be considered macro-critical. The need for more work in defining and promoting sources of growth in PRGF countries, including the scope for stronger emphasis on financial sector development, was highlighted in this regard. Some Directors considered that growth-enhancing policies may also be macro-critical to restoring medium-term balance-of-payments viability and debt sustainability in the context of stand-by and extended arrangements. Directors agreed that in countries suffering sudden and massive outflows of private capital, a critical mass of frontloaded reform may be required to restore market confidence. They stressed that conditionality should nevertheless be focused on reforms that tackle the root of the crisis, and a number of Directors cautioned against overloading the program with numerous conditions that could undermine implementation capacity.
Directors noted that the need to take account of differences in country-specific circumstances has been the most important reason for variation in the scope and coverage of conditionality among countries in applying the interim guidelines thus far. These circumstances have typically included a possible need to establish a track record of strong policy implementation or achieve a critical mass of front-loaded reforms, or the need to take into account limitations in administrative capacity. Most Directors considered that experience thus far pointed to a broadly satisfactory use of the modalities of conditionality. It was noted, however, that, in the context of the overall review of conditionality guidelines, it would be useful to clarify the appropriate use of prior actions in light of today’s discussion and the understandings reached by Directors on this issue at their meeting on January 28. While recognizing that variation in the extent of conditionality is the consequence of the wide and unique circumstances of member countries, Directors noted, however, that the inclusion or exclusion of conditions was not always clearly linked to these circumstances. A number of Directors suggested that further progress in narrowing variation among country experiences to ensure greater uniformity of treatment would be desirable, although the difficulty of developing more specific guidelines toward that end was recognized. Some Directors emphasized that a numerical approach to gauge how conditionality is being applied is less important than an approach that stresses the application of the right conditionality in individual cases.
The determination of whether any specific action is critical to the success of a particular program is inherently a matter of judgment. Directors emphasized that staff reports should, in any event, provide enough information to facilitate such judgments. In most cases, the magnitude of the fiscal impact is likely to be a key factor, suggesting that the weaker and less direct a measure’s impact is on the fiscal accounts, the stronger will be the need to justify its inclusion in the program’s conditionality. Directors also suggested various ways to further improve the flow of information on program conditionality in staff reports and at Executive Board meetings, and to guide judgments on the appropriateness of including or excluding certain measures.
While welcoming progress, Directors stressed that further strengthening and clarification of the collaboration with the World Bank will be key to effective streamlining of conditionality. They looked forward to undertaking a more detailed review of that process this summer, and also agreed that it would be useful to address this issue in the Joint Board Committee on Bank/Fund Collaboration. Directors underscored that Fund-supported programs should be consistent with an overall country-led framework, which would often require support from the World Bank and other agencies in addition to the Fund. The nature and extent of collaboration would necessarily be more extensive in PRGF countries, but, in all cases, the appropriate coverage of conditionality could be assessed only by taking proper account of the role of each agency that is involved.
A number of Directors expressed concern that the Fund’s initiative in streamlining and focusing conditionality might not result in an overall reduction in conditionality when all international financial institutions were considered, and they asked for further careful assessment and monitoring of this aspect. At the same time, a number of Directors were concerned that areas no longer covered by Fund conditionality might not be adequately covered by other agencies, particularly the World Bank. To ensure that such concerns can be adequately addressed, Directors stressed the need for careful documentation in staff reports on the division of labor between the Fund and the Bank, the structure and timing of Bank conditionality, the progress achieved, and the implications for the fiscal situation and the program in general.
Directors agreed that it would be useful to consolidate the progress that has been made in this review, and, in that context, to next consider the development of new guidelines on conditionality. Building on the Interim Guidance Note of September 2000 and the experience gained since then, these guidelines would provide a framework that will enable the Fund to apply conditionality parsimoniously and consistently, based on national ownership, with the objective of enhancing the effectiveness of Fund-supported programs. Directors also looked forward to periodic reviews of the evolving experience with Fund conditionality to ensure the consistent implementation of the guidelines over time, as well as their contribution to greater program effectiveness.
Relationship Between Performance Criteria and Phasing of Purchases Under Fund Arrangements—Operational Guidelines
1. As a general rule, every effort should be made to limit the lag between the beginning of the annual program period and the date of discussion by the Executive Board of supporting annual arrangement (or the annual segment of a multiyear arrangement) to a minimum. This would facilitate the inclusion of quarterly performance criteria throughout the program period and of purchases throughout the period of the arrangement, thereby strengthening the link between Fund financing and adjustment.
2. Particular attention should be given to minimizing lags in reporting of data relating to performance criteria without loss of reliability of data. It would be reasonable for the Fund to expect that all members seeking the Fund’s support should be able to limit reporting lags to two months. In very exceptional cases where reporting lags exceed two months, the staff will explain the reasons for such lags as well as the steps being taken to reduce them.
3. Every effort should be made to limit the period between the approval of an adjustment program by management and the date when the supporting arrangement is discussed by the Executive Board to no more than three months. Should the period be exceeded, the staff would confirm before the Board discussion of the arrangement that the program as originally proposed remains generally appropriate. In those exceptional cases where the delay indicates a significant slippage in the implementation of the agreed program, the staff would renegotiate the program, including the performance criteria and phasing of purchases.
4. There would be no fewer than four purchases during a 12-month period of the arrangement, five being the preferred course of action. The purchase dates would also be distributed as evenly as possible throughout the arrangement. However, problems have often been experienced in this regard because of a bunching of the first two purchases under an arrangement and/or the last purchase occurring unduly early before the end of the arrangement. In order to avoid such problems, as a general rule, the date of the second purchase would not be earlier than two months from the initial purchase on approval of the arrangement and the date of the last purchase would not be earlier than two months before the end of the arrangement. One possible exception would be the case where initial Executive Board approval has been only in principle and final approval follows later by up to 30 days.
5. The test dates for performance criteria would also be distributed as evenly as possible through the period of the arrangement. Normally the date of the first performance test would not be earlier than the date on which the arrangement becomes effective, and the date of the last performance test would not be earlier than three months from the end of the arrangement.
6. Every effort should be made to include performance criteria initially for as much of the 12-month period of the Fund arrangement as possible. However, it may not be possible always to establish in advance one or more performance criteria for part of the period of the arrangement because of substantial uncertainties about major economic trends and normal time lags between the completion of negotiations on the arrangement and Board discussion of the arrangement. Taking into account both sets of factors, as well as the actual experience in recent years, it would be reasonable to expect that, as a normal rule, performance criteria would be included initially which would govern purchases over a period of at least six months of the arrangement. This would normally involve at least two sets of performance criteria. Where this minimum period is not met, the staff report would include a full explanation of the underlying reasons.
7. As a general rule, indicative targets would be included at the outset for that part of the 12-month arrangement for which performance criteria are yet to be established. Provision will also be made for a review in order to replace these indicative targets later with performance criteria. Indicative targets will also be included for the last month of the arrangement period.
8. In the case of segments within the framework of a multiyear arrangement, normally performance criteria would be set up to the end of each underlying annual program period. The purchase after the end of the underlying annual program (which may be the last purchase under the preceding segment of the arrangement or the first purchase under the subsequent segment) would be contingent both on understandings being reached with the Fund on the next year’s underlying program and on observance of performance criteria for the end of the preceding program period or established in the context of the member’s new program, or on a waiver being approved by the Board in the case of nonobservance of these performance criteria.
9. Notwithstanding the foregoing, in the case of extended arrangements, performance criteria and purchases could be phased at semiannual intervals, provided that appropriate monitoring of macroeconomic developments would be ensured, normally in the form of quarterly benchmarks.
Decision No. 7925-(85/38),
March 8, 1985,
as amended by Decision No. 8887-(88/89),
June 6, 1988
Guidelines on Performance Criteria with Respect to External Debt in Fund Arrangements
The Executive Board approves the Chairman’s summing up on external debt management policies as set forth [below].
Decision No. 6230-(79/140),
August 3, 1979,
as amended by Decision Nos. 11096-(95/100), October 25, 1995,
August 24, 2000
The Chairman’s Summing Up on External Debt Management Policies Executive Board Meetings 79/106 and 79/107, July 6, 1979 and Executive Board Meeting 79/121, July 23, 1979
In the context of a general discussion of the issues relating to external debt management policies, the Executive Board considered the following guideline on the performance criteria with respect to foreign debt:
When the size and the rate of growth of external indebtedness is a relevant factor in the design of an adjustment program, a performance criterion relating to official and officially guaranteed foreign debt will be included in upper credit tranche arrangements. The criterion will include all forms of debt, including loans, suppliers’ credits and leases, that constitute current, i.e., not contingent, liabilities, which are created under a contractual arrangement through the provision of value in the form of assets (including currency) or services, and which require the obligor to make one or more payments in the form of assets (including currency) or services, at some future point(s) in time; these payments discharge the principal and/or interest liabilities incurred under the contract. The criterion will include foreign debts with maturities of over one year, and, in appropriate cases and where specifically provided, other financial instruments that have the potential to create substantial external liabilities for governments. The criterion will usually be formulated in terms of debts contracted or authorized. However, in appropriate cases, it may be formulated in terms of net disbursements or net changes in the stock of external official and officially guaranteed debt. Flexibility will be exercised to ensure that the use of the performance criterion will not discourage capital flows of a concessional nature by excluding from the coverage of performance criteria debts defined as concessional on the basis of currency-specific discount rates based on the OECD commercial interest reference rates, and including a grant element of at least 35 percent, provided that a higher grant element may be required in exceptional cases. Normally, the performance criterion will include a subceiling on foreign debt with maturities of over one year and up to five years. Additional subceilings may also be included on debt with specified maturities beyond five years or with a specified grant element lower than 35 percent.
Adoption of this guideline will be subject to the understanding that the staff will be guided also by the following points:
1. The above guideline will be applied with a reasonable degree of flexibility while safeguarding the principle of uniformity of treatment among members. The external debt guideline should be interpreted in the light of the general guidelines on conditionality (Decision No. 6056-(79/38)), especially guideline No. 4, which states:
In helping members to devise adjustment programs, the Fund will pay due regard to the domestic social and political objectives, the economic priorities, and the circumstances of members, including the causes of their balance of payments problems.
Also, guideline No. 9 includes the following:
The number and content of performance criteria may vary because of the diversity of problems and institutional arrangements of members. Performance criteria will be limited to those that are necessary to evaluate implementation of the program with a view to ensuring the achievement of its objectives.
Furthermore, guideline No. 8 states:
The Managing Director will ensure adequate coordination in the application of policies relating to the use of the Fund’s general resources with a view to maintaining the nondiscriminatory treatment of members.
2. In analyzing the amount and terms of new debt that would be appropriate—in the member’s circumstances—over the medium term, the staff will take into account prospective developments in the member’s external payments situation and the profile of its external indebtedness.
3. In formulating external debt criteria, the staff will be mindful of the need to ensure consistency between external debt management policies and domestic financial policies. Where external debt per se is not a matter for concern, but adjustment programs have as a main objective to reduce excess demand pressures and restore overall balance to the public sector finances, the credit ceiling for the public sector would cover both domestic and foreign financing of the overall public sector deficit.
4. Normally the performance criterion will relate to official and officially guaranteed foreign debt. The coverage will include official entities for which the government is financially responsible as well as private debt for which official guarantees have been extended and which, therefore, constitute a contingent liability of the government.
5. In cases where the member’s external debt management policy covers private sector debt without official guarantee and there is an established regulatory machinery to control such debt, it will be proposed that the performance criterion on foreign debt should be adapted accordingly.
6. The staff is encouraged to include short-term debt of a maturity of less than one year in the performance criteria relating to foreign debt, while allowing some flexibility in light of the different institutional reporting procedures employed by members and the statistical difficulties of recording that category.
7. The guideline provides for excluding from the coverage of performance criteria those debts defined as concessional on the basis of currency-specific discount rates based on the OECD commercial interest reference rates and including a specified grant element. In some cases, member countries utilize credits associated with concessional debts. The staff will take this into account in discussing the appropriate amount of debt.
8. In principle, a performance criterion on foreign debt will incorporate by reference the definition of debt set forth in point No. 9 below. Financial instruments that are not covered under the definition but have the potential to create substantial external liabilities for governments will be included in the performance criterion where appropriate, in which case they would be explicitly specified.
9. (a) For the purpose of this guideline, the term “debt” will be understood to mean a current, i.e., not contingent, liability, created under a contractual arrangement through the provision of value in the form of assets (including currency) or services, and which requires the obligor to make one or more payments in the form of assets (including currency) or services, at some future point(s) in time; these payments will discharge the principal and/or interest liabilities incurred under the contract. Debts can take a number of forms, the primary ones being as follows:
- (i) loans, i.e., advances of money to the obligor by the lender made on the basis of an undertaking that the obligor will repay the funds in the future (including deposits, bonds, debentures, commercial loans and buyers’ credits) and temporary exchanges of assets that are equivalent to fully collateralized loans under which the obligor is required to repay the funds, and usually pay interest, by repurchasing the collateral from the buyer in the future (such as repurchase agreements and official swap arrangements);
- (ii) suppliers’ credits, i.e., contracts where the supplier permits the obligor to defer payments until some time after the date on which the goods are delivered or services are provided; and
- (iii) leases, i.e., arrangements under which property is provided which the lessee has the right to use for one or more specified period(s) of time that are usually shorter than the total expected service life of the property, while the lessor retains the title to the property. For the purpose of the guideline, the debt is the present value (at the inception of the lease) of all lease payments expected to be made during the period of the agreement excluding those payments that cover the operation, repair, or maintenance of the property.
(b) Under the definition of debt set out in point 9 (a) above, arrears, penalties, and judicially awarded damages arising from the failure to make payment under a contractual obligation that constitutes debt are debt. Failure to make payment on an obligation that is not considered debt under this definition (e.g., payment on delivery) will not give rise to debt.
Guidelines on Performance Criteria with Respect to Foreign Borrowing—Change in Implementation of Revised Guidelines
For purposes of implementation of the Guidelines on Performance Criteria with Respect to Foreign Borrowing, as amended (Decision No. 6230-(79/140), the Executive Board endorses the revised method of calculation of the discount rate described in SM/96/86 (4/8/96).
Decision No. 11248-(96/38),
April 15, 1996
Hence, the staff proposes that under arrangements approved from May 1, 1996 onwards, the average of CIRRs over the last ten years should be used as the discount rate for assessing the concessionality of loans of a maturity of at least 15 years. One effect of this change will be that some loans from multilateral development banks and from some bilateral creditors, including OECF of Japan, will be treated as concessional and excluded from borrowing limits in Fund arrangements. This should alleviate some operational problems that have arisen in the treatment of these loans.
Similar problems of frequent classification changes arise in assessing the concessionality of loans with shorter maturities. For these loans, it is proposed that instead of current CIRRs, the average CIRRs of the preceding six-month period (February 15 to August 14 or August 15 to February 14) be used in assessing the concessionality. This approach would follow more closely that used by the OECD and would reduce the frequency of changes in assessments of concessionality.
To both the ten-year and six-month averages, the same margins for differing repayment periods as those used by the OECD would continue to be added (0.75 percent for repayment periods of less than 15 years, 1 percent for 15 to 19 years, 1.15 percent for 20 to 29 years, and 1.25 percent for 30 years or more). Table 1 shows current CIRRs, six-month average CIRRs, and the ten-year averages of CIRRs at end-1995.1
The staff proposes to follow this approach as an interim methodology to ensure that frequent changes in the assessment of concessionality are minimized and that longer term multilateral and bilateral loans are not subject to the borrowing limits in Fund arrangements in a way that was not intended by the Board. This issue would be reviewed in the context of the review of borrowing limits envisaged before the end of the year referred to above.2 Accordingly, the attached decision is proposed for adoption by the Executive Board on a lapse-of-time basis. …
Extended Fund Facility
(i) The Executive Directors have been considering the establishment of an extended facility for members that would enable the Fund to give medium-term assistance in the special circumstances of balance of payments difficulty that are indicated in this decision. The facility, in its formulation and administration, is likely to be beneficial for developing countries in particular.
(ii) The Executive Directors have noted the studies prepared by the staff, including SM/74/58 (“Extended Fund Facility,” March 8, 1974), and especially paragraphs 12 to 16 of that memorandum, in which certain situations to which an extended facility could apply, are described as follows:
- (a) an economy suffering serious payments imbalance relating to structural maladjustments in production and trade and where prices and cost distortions have been widespread;
- (b) an economy characterized by slow growth and an inherently weak balance of payments position which prevents pursuit of an active development policy.
(iii) The Executive Directors have noted the support for an extended facility by the Committee of the Board of Governors on the Reform of the International Monetary System and Related Issues.
(iv) Taking into account the considerations set forth above, and in particular the exceptional problems faced by some members, the Executive Directors have decided to establish a facility in accordance with the terms set forth in Section II of this decision for the purpose of giving such members medium-term assistance, consistently with Article I(v) and the other purposes of the Fund, under extended arrangements.
1. The Fund will be prepared to give special assistance to members to meet balance of payments deficits for longer periods and in amounts larger in relation to quotas than has been the practice under existing tranche policies. Such assistance will be given in the form of extended arrangements in support of comprehensive programs that include policies of the scope and character required to correct structural imbalances in production, trade, and prices when it is expected that the needed improvement in the member’s balance of payments can be achieved without policies inconsistent with the purposes of the Fund only over an extended period. The Fund will pay particular attention to the policy measures that the member intends to implement in order to mobilize resources and improve the utilization of them and to reduce reliance on external restrictions, the time required for these measures to have the intended effect on the balance of payments, and such other factors as the Fund considers relevant to the member’s circumstances.
2. A member that contemplates making a request for an extended arrangement should consult the Managing Director before making a request under this decision. A request by a member for an extended arrangement in order to deal with a problem of the kind referred to in this decision will be met, subject to paragraphs 3 and 4 below, if the Fund is satisfied that
(a) the solution of the member’s balance of payments problem will require a longer period than the period for which the resources of the Fund are available under existing tranche policies, and
(b) the member has presented:
- (i) a program, setting forth the objectives and policies for the whole period of the extended arrangement, and adequate for the solution of the member’s problem; and
- (ii) a detailed statement of the policies and measures for the first 12 months constituting an initiation of the program referred to in (i) considered substantial in the member’s circumstances,
with the understanding that, for each subsequent 12-month period, the member will present to the Fund a detailed statement of the progress made, and the policies and measures as in (ii) that will be followed, to further the realization of the objectives of the program referred to in (i) with such modifications in the member’s policies as might reasonably be considered necessary to assist it to achieve its objectives in changing circumstances.
3. Extended arrangements under this decision will be for periods not exceeding three years; where appropriate, and at the request of the member, the period of an existing extended arrangement may be lengthened up to four years. Each arrangement will prescribe the total amount, and the annual installments within the total, available in accordance with the original or any modified terms of the arrangement. Purchases in respect of each installment will be phased over the period in which it is available and will be subject to suitable performance clauses related to the implementation of those policies that are necessary for achieving the objectives of the program that the member has adopted as the basis for an extended arrangement.
4. (a) …1
(b) In order to carry out the purposes of this decision, the Fund will be prepared to grant any waiver of the conditions of Article V, Section 3(a)(iii)2 when necessary to permit purchases under this decision or to permit purchases under other policies that would raise the Fund’s holdings of a member’s currency above the limits referred to in that provision because of purchases outstanding under this decision.
5. A member that has obtained an extended arrangement under this decision will make repurchases corresponding to purchases under the extended arrangement to the extent that such purchases are still outstanding, as soon as its balance of payments problems have been overcome and, in any event, within an outside range of four to ten years after each purchase. Not later than four years after the first purchase under the extended arrangement the member will propose to the Fund a schedule of repurchases for all purchases outstanding under the extended arrangement. Normally, schedules under this paragraph will provide for repurchases in respect of each purchase of 12 equal six-monthly installments.
6. When purchases are made under extended arrangements granted pursuant to this decision, the Fund will so indicate in an appropriate manner.
7. The Fund will levy charges on holdings of a member’s currency resulting from purchases outstanding under this decision in accordance with Executive Board Decision No. 4378-(74/114), adopted September 13, 1974.
8. Except as otherwise provided in this or in any subsequent related decisions, extended arrangements shall be subject to the Fund’s decisions and policies on stand-by arrangements.
9. The Fund will review this decision in the light of experience and developing circumstances when the total amount of purchases that could be made under extended arrangements is equivalent to two billion special drawing rights, and in any event not later than July 31, 1976.
10. (a) In addition to making repurchases in accordance with paragraph 5, a member will be expected to repurchase an amount of the Fund’s holdings of its currency resulting from purchases under this decision made after November 28, 2000 equal to, and at the time of, the six-monthly installments of repurchases falling due during the period beginning four years and ending seven years after the date of the purchase, provided that the Fund may, upon request by the member, amend the schedule of repurchase expectations, if in the judgment of the Fund the member’s external position is not sufficiently strong for repurchases to be made pursuant to the expectation schedule set out in this paragraph. In determining whether to amend the schedule, the Fund may consider all relevant information, including the size of the member’s foreign reserves, the member’s medium-term balance of payments outlook, and the degree of the member’s access to international capital markets.
(b) The Fund shall not approve, and the Managing Director shall not recommend for approval, any request for the use of the Fund’s general resources by a member that is failing to meet a repurchase expectation under paragraph 10(a) above. Provision shall be made in each stand-by and extended arrangement for the suspension of further purchases under the arrangement whenever a member fails to meet a repurchase expectation under paragraph 10(a) above.
11. The Fund shall review the time-based repurchase expectation scheme set out in paragraph 10(a) of Decision No. 4377-(74/114), adopted September 13, 1974, no later than November 30, 2005.
Decision No. 4377-(74/114),
September 13, 1974,
as amended by Decision Nos. 6339-(79/179), December 3, 1979,
6830-(81/65), April 22, 1981, effective May 1, 1981,
8885-(88/89), June 6, 1988,
10182-(92/132), November 3, 1992,
10186-(92/132), November 3, 1992, and
November 28, 2000
Stand-By and Extended Arrangements—Standard Forms
The Executive Board approves the standard forms of stand-by and extended arrangements contained in Attachments A and B to SM/93/207 (9/3/93), and the standard clauses contained in Attachment C to SM/93/207, to be added to those arrangements in cases of requests for (i) a decision on external contingency financing under the compensatory and contingency financing facility in association with an arrangement, or (ii) set-asides in support of operations involving debt reduction.
Decision No. 10464-(93/130),
September 13, 1993
Attachment A Form of Stand-By Arrangement
Attached hereto is a letter [, with annexed memorandum,] dated _______ from (Minister of Finance and/or Governor of Central Bank) requesting a stand-by arrangement and setting forth:
(a) the objectives and policies that the authorities of (member) intend to pursue for the period of this stand-by arrangement;
(b) the policies and measures that the authorities of (member) intend to pursue the [first year] of this stand-by arrangement; and
(c) understandings of (member) with the Fund regarding [a] review[s] that will be made of progress in realizing the objectives of the program and of the policies and measures that the authorities of (member) will pursue for the remaining period of this stand-by arrangement.
To support these objectives and policies the International Monetary Fund grants this stand-by arrangement in accordance with the following provisions:
1. [For a period of _________ years from ________] [For the period from __________ to_________] (member) will have the right to make purchases from the Fund in an amount equivalent to SDR __________ million, subject to paragraphs 2, 3, 4, and 5 below, without further review by the Fund.
2. (a) Purchases under this stand-by arrangement shall not, without the consent of the Fund, exceed the equivalent of SDR _______ million, provided that purchases shall not exceed the equivalent of SDR _________ million until ___________, and the equivalent of SDR ___________ million until ___________.
(b) The right of (member) to make purchases during the remaining period of this stand-by arrangement shall be subject to such phasing as shall be determined.
(c) None of the limits in (a) or (b) above shall apply to a purchase under this stand-by arrangement that would not increase the Fund’s holdings of (member’s) currency subject to repurchase beyond 25 percent of quota.
3. (Member) will not make purchases under this stand-by arrangement that would increase the Fund’s holdings of (member’s) currency subject to repurchase beyond 25 percent of quota:
(a) during any period in which the data at the end of the preceding period indicate that1
- (i) [the limit on net international reserves of [Central Bank] described in paragraph ____ of the attached [letter] [memorandum]], or
- (ii) [the limit on the net domestic borrowing of the public sector described in paragraph _____ of the attached [letter] [memorandum]], or
- (iii) [the limit on the net domestic assets of the Central Bank described in paragraph ____ of the attached [letter] [memorandum]], or
- (iv) [these provisions would incorporate other [quantitative or structural] performance criteria monitored at the end of the preceding period]
[specified in [Tables 1, 2, 3, and 4] [paragraphs ……], respectively, of the [letter] [memorandum] is not observed; or
(b) [if at any time during the period of the arrangement] [while]
- (i) [the limit on the contracting and guaranteeing of external public debt with original maturity of ___ described in paragraph ___ of the attached [letter] [memorandum]], or
- (ii) [the limit on external payments arrears described in paragraph_of the attached [letter] [memorandum]], or
- (iii) [these provisions would incorporate other [quantitative or structural] performance criteria continuously monitored]
[specified in [Tables 5, 6, and 7] [paragraphs ____], respectively, of the [letter] [memorandum] is not observed, or
(c) after _____ and ______, until the respective review[s] contemplated in paragraph ___ of the attached [letter] [memorandum] is [are] completed, or
(d) if at any time during the period of the stand-by arrangement, (member)
- (i) imposes or intensifies restrictions on the making of payments and transfers for current international transactions, or
- (ii) introduces or modifies multiple currency practices;1 or
- (iii) concludes bilateral payments agreements which are inconsistent with Article VIII, or
- (iv) imposes or intensifies import restrictions for balance of payments reasons.
When (member) is prevented from purchasing under this stand-by arrangement because of this paragraph 3, purchases will be resumed only after consultation has taken place between the Fund and (member) and understandings have been reached regarding the circumstances in which such purchases can be resumed.
4. (Member) will not make purchases under this [stand-by][extended] arrangement during any period in which (member): (i) has an overdue financial obligation to the Fund or is failing to meet a repurchase expectation (a) in respect of a noncomplying purchase pursuant to Decision No. 7842-(84/165) on the Guidelines on Corrective Action, or (b) in respect of a purchase in support of debt and debt service reduction operation pursuant to Decision No. 9331-(89/167), or (c) pursuant to paragraphs 17 and 31 of Decision No. 8955-(88/126), on the Compensatory Financing Facility, or (d) in respect of a purchase under Decision No. 11627-(97/123) SRF on the Supplemental Reserve Facility and Contingent Credit Lines, or (e) pursuant to paragraph 1(b) of Decision No. 5703-(78/39) or paragraph 10(a) of Decision No. 4377-(74/114); or (ii) is failing to meet a repayment obligation to the PRGF Trust established by Decision No. 8759-(87/176) PRGF, or a repayment expectation to that Trust pursuant to the provisions of Appendix I to the PRGF Trust Instrument.
5. (Member’s) right to engage in the transactions covered by this stand-by arrangement can be suspended only with respect to requests received by the Fund after (a) a formal ineligibility, or (b) a decision of the Executive Board to suspend transactions, either generally or in order to consider a proposal, made by an Executive Director or the Managing Director, formally to suppress or to limit the eligibilty of (member). When notice of a decision of formal ineligibility or of a decision to consider a proposal is given pursuant to this paragraph 5, purchases under this arrangement will be resumed only after consultation has taken place between the Fund and (member) and understandings have been reached regarding the circumstances in which such purchases can be resumed.
6. Purchases under this stand-by arrangement shall be made in the currencies of other members selected in accordance with the policies and procedures of the Fund, unless, at the request of (member), the Fund agrees to provide SDRs at the time of the purchase.
7. (Member) shall pay a charge for this stand-by arrangement in accordance with the decisions of the Fund.
8. (a) (Member) shall repurchase the amount of its currency that results from a purchase under this stand-by arrangement in accordance with the provisions of the Articles of Agreement and decisions of the Fund, including those relating to repurchase as (member’s) balance of payments and reserve position improves.
(b) Any reductions in (member’s) currency held by the Fund shall reduce the amounts subject to repurchase under (a) above in accordance with the principles applied by the Fund for this purpose at the time of the reduction.
9. During the period of the stand-by arrangement member) shall remain in close consultation with the Fund. These consultations may include correspondence and visits of officials of the Fund to (member) or of representatives of (member) to the Fund. (Member) shall provide the Fund, through reports at intervals or dates requested by the Fund, with such information as the Fund requests in connection with the progress of (member) in achieving the objectives and policies set forth in the attached letter [and annexed memorandum].
10. In accordance with paragraph ___ of the attached letter, (member) will consult the Fund on the adoption of any measures that may be appropriate at the initiative of the government or whenever the Managing Director requests consultation because any of the criteria in paragraph 3 above have not been observed or because the Managing Director considers that consultation on the program is desirable. In addition, after the period of the arrangement and while (member) has outstanding purchases in the upper credit tranches, the government will consult with the Fund from time to time, at the initiative of the government or at the request of the Managing Director, concerning (member’s) balance of payments policies.
Attachment B Form of Extended Arrangement
Attached hereto is a letter [, with annexed memorandum,] dated ________ from (Minister of Finance and/or Governor of Central Bank) requesting an extended arrangement and setting forth:
(a) the objectives and policies that the authorities of (member) intend to pursue for the period of this extended arrangement;
(b) the policies and measures that the authorities of (member) intend to pursue during the first year of this extended arrangement; and
(c) understandings of (member) with the Fund regarding reviews that will be made of progress in realizing the objectives of the program and of the policies and measures that the authorities of (member) will pursue for the second and third years of this extended arrangement.
To support these objectives and policies the International Monetary Fund grants this extended arrangement in accordance with the following provisions:
1. For a period of [three years] from _______ (member) will have the right to make purchases from the Fund in an amount equivalent to SDR ______ million, subject to paragraphs 2, 3, 4, and 5 below, without further review by the Fund.
2. (a) Purchases under this extended arrangement shall not, without the consent of the Fund, exceed the equivalent of SDR ______ million until ________, the equivalent of SDR _______ million until ______, the equivalent of SDR _____ million until ______, and the equivalent of SDR ______ million until _______.
(b) Until (end of second year) purchases under this extended arrangement shall not, without the consent of the Fund, exceed the equivalent of SDR _________ million.
(c) the right of (member) to make purchases during the second and third years shall be subject to such phasing as shall be determined.
3. (Member) will not make purchases under this extended arrangement:
(a) during any period in which the data at the end of the preceding period indicate that1
- (i) [the limit on net international reserves of [Central Bank] described in paragraph ___ of the attached [letter] [memorandum]], or
- (ii) [the limit on net domestic borrowing of the public sector described in paragraph ___ of the attached [letter] [memorandum]], or
- (iii) [the limit on the net domestic assets of the Central Bank described in paragraph ___ of the attached [letter] [memorandum]], or
- (iv) [these provisions would incorporate other [quantitative or structural] performance criteria monitored at the end of the preceding period]
[specified in [Tables 1, 2, 3 and 4] [paragraphs ____], respectively, of the [letter] [memorandum] is not observed; or
(b) [if at any time during the period of the arrangement] [while]
- (i) [the limit on the contracting or guaranteeing of external public debt with original maturity of ___ described in paragraph ___ of the attached [letter] [memorandum]], or
- (ii) [the limit on external payments arrears described in paragraph ____ of the attached [letter] [memorandum]], or
- (iii) [these provisions would incorporate other [quantitative or structural] performance criteria continuously monitored]
[specified in [Tables 5, 6 and 7] [paragraphs ___], respectively, of the [letter] [memorandum]], is not observed, or
(c) after ___ and ___, until the review[s] contemplated in paragraph __ of the attached [letter] [memorandum] is [are] completed, or
(d) if at any time during the period of the extended arrangement, (member)
- (i) imposes or intensifies restrictions on the making of payments and transfers for current international transactions, or
- (ii) introduces or modifies multiple currency practices;1 or
- (iii) concludes bilateral payments agreements which are inconsistent with Article VIII, or
- (iv) imposes or intensifies import restrictions for balance of payments reasons.
When (member) is prevented from purchasing under this extended arrangement because of this paragraph 3, purchases will be resumed only after consultation has taken place between the Fund and (member) and understandings have been reached regarding the circumstances in which such purchases can be resumed.
4. (Member) will not make purchases under this [stand-by][extended] arrangement during any period in which (member): (i) has an overdue financial obligation to the Fund or is failing to meet a repurchase expectation (a) in respect of a noncomplying purchase pursuant to Decision No. 7842-(84/165) on the Guidelines on Corrective Action, or (b) in respect of a purchase in support of debt and debt service reduction operation pursuant to Decision No. 9331-(89/167), or (c) pursuant to paragraphs 17 and 31 of Decision No. 8955-(88/126), on the Compensatory Financing Facility, or (d) in respect of a purchase under Decision No. 11627-(97/123) SRF on the Supplemental Reserve Facility and Contingent Credit Lines, or (e) pursuant to paragraph 1(b) of Decision No. 5703-(78/39) or paragraph 10(a) of Decision No. 4377-(74/114); or (ii) is failing to meet a repayment obligation to the PRGF Trust established by Decision No. 8759-(87/176) PRGF, or a repayment expectation to that Trust pursuant to the provisions of Appendix I to the PRGF Trust Instrument.
5. (Member’s) right to engage in the transactions covered by this extended arrangement can be suspended only with respect to requests received by the Fund after (a) a formal ineligibility, or (b) a decision of the Executive Board to suspend transactions, either generally or in order to consider a proposal, made by an Executive Director or the Managing Director, formally to suppress or to limit the eligibility of (member). When notice of a decision of formal ineligibility or of a decision to consider a proposal is given pursuant to this paragraph 5, purchases under this arrangement will be resumed only after consultation has taken place between the Fund and (member) and understandings have been reached regarding the circumstances in which such purchases can be resumed.
6. Purchases under this extended arrangement shall be made in the currencies of other members selected in accordance with the policies and procedures of the Fund, unless, at the request of (member), the Fund agrees to provide SDRs at the time of the purchase.
7. (Member) shall pay a charge for this extended arrangement in accordance with the decisions of the Fund.
8. (a) (Member) shall repurchase the amount of its currency that results from a purchase under this extended arrangement in accordance with the provisions of the Articles of Agreement and decisions of the Fund, including those relating to repurchase as (member’s) balance of payments and reserve position improves.
(b) Any reductions in (member’s) currency held by the Fund shall reduce the amounts subject to repurchase under (a) above in accordance with the principles applied by the Fund for this purpose at the time of the reduction.
9. During the period of the extended arrangement (member) shall remain in close consultation with the Fund. These consultations may include correspondence and visits of officials of the Fund to (member) or of representatives of (member) to the Fund. (Member) shall provide the Fund, through reports at intervals or dates requested by the Fund, with such information as the Fund requests in connection with the progress of (member) in achieving the objectives and policies set forth in the attached letter [and annexed memorandum].
10. In accordance with paragraph ____ of the attached letter, (member) will consult with the Fund on the adoption of any measures that may be appropriate at the initiative of the government or whenever the Managing Director requests consultation because any of the criteria in paragraph 3 above have not been observed or because the Managing Director considers that consultation on the program is desirable. In addition, after the period of the arrangement and while (member) has outstanding purchases under this arrangement, the government will consult with the Fund from time to time, at the initiative of the government or at the request of the Managing Director, concerning (member’s) balance of payments policies.
Completion of Reviews Under Stand-By and Extended Arrangements
The Fund shall not complete a review under a stand-by or extended arrangement unless and until all other conditions for the availability of an associated purchase have been met or waived (EBS/00/172, 8/18/00).
Decision No. 12278-(00/86),
August 25, 2000
Reviews Under Fund Arrangements—Lapse of Time Procedure
1. The procedures set forth in Annex II to SM/07/379, entitled “Lapse of Time Completion of Program Reviews” are approved and will apply to proposals for lapse of time completion of program reviews made after the effective date of this decision.
2. Decision No. 11515-(97/59), adopted June 9, 1997 is hereby repealed.
Decision No. 14003-(07/107),
December 6, 2007
ANNEX II – Lapse of Time Completion of Program Reviews
1. The completion of a program review under a Fund financial arrangement on a lapse of time basis may be proposed by the Managing Director, the Executive Director for the member concerned, or, with that Executive Director’s agreement, another Executive Director.
2. Eligibility for Lapse of Time: The completion of a program review on a lapse of time basis may be proposed where: (a) The Managing Director has determined that all applicable performance criteria and structural benchmarks have been met, or any requested waivers, cases of nonobservance of structural benchmarks, or modifications to the arrangement are minor so that the thrust of the policies and objectives supported by the arrangement are expected to be maintained; and (b) The review does not raise general policy issues requiring Board discussion.
3. Ineligibility for Lapse of Time: Notwithstanding paragraph 2 above, lapse of time consideration of a review may not be proposed where: (a) the member’s program is supported with exceptional access to Fund resources; or (b) the most recent program review under the Fund arrangement presently in force for the member was concluded on a lapse of time basis.
4. Procedures for Proposing Lapse of Time
(a) By the Managing Director: The Managing Director’s proposal for completion of a program review on a lapse of time basis will be made at the time of circulation of the staff paper for the review to the Executive Board. The cover memorandum for the circulated staff paper will: (i) include a deadline for Executive Directors to object to a proposal by the Managing Director for lapse of time completion that is consistent with paragraph 5 below; (ii) specify the date upon which the decision will become effective if no objection to the proposal for lapse of time completion is received; (iii) specify a reserved date, consistent with minimum circulation periods for program reviews, for discussion if an Executive Director objects to the proposal for lapse of time consideration; and (iv) explain the reasons why lapse of time completion is warranted.
(b) By an Executive Director: An Executive Director may propose the completion of a program review on a lapse of time basis no more than two days after the issuance of the staff paper for the program review to the Executive Board, and preferably, as soon as possible after the circulation of the staff paper. An Executive Director’s proposal for lapse of time completion of a program review shall provide the reasons why lapse of time consideration is warranted. A notification of an Executive Director’s proposal for lapse of time completion of a program review will be issued to the Executive Board that will: (i) include a deadline for Executive Directors to object to the proposal for lapse of time completion that is consistent with paragraph 5 below; (ii) specify the date upon which the decision will become effective if no objection to the proposal for lapse of time completion is received; (iii) specify a reserved date, consistent with minimum circulation periods for program reviews, for discussion if an Executive Director objects to the proposal for lapse of time consideration; and (iv) set out the reasons presented by the relevant Executive Director as to why lapse of time completion is warranted.
5. Objections: An Executive Director may object to a proposal for lapse of time completion of a program review no later than five business days after the issuance of the staff paper for the program review to the Executive Board, and need not state the reason for such objection. Whenever an Executive Director objects to completion of a program review on a lapse of time basis, the staff paper for the program review shall be discussed by the Executive Board on the date that has been reserved for discussion, consistent with the minimum circulation guidelines for staff papers for program reviews.
6. Effective Date of Review: If no objection is received to a proposal for a lapse of time completion of a program review during the period in which such objections may be made, the proposed decision(s) associated with the program review will be approved with effect on the date of effectiveness stated in the cover note described in paragraph 4 above.
A New Facility for Market Access Countries—The Short-Term Liquidity Facility
I. Establishment of the Short-Term Liquidity Facility
1. For a period of two years from October 29, 2008, the Fund will be prepared to provide financial assistance in accordance with the terms of this Decision to a member that is experiencing exceptional balance of payments difficulties reflected in pressure on the capital account and the member’s reserves which, taking into account the strength of the member’s policies and its underlying fundamentals, are judged to be quickly self-correcting.
2. Financing under this Decision will be available to members only in cases where the Fund assesses that the member’s policies and underlying fundamentals are very strong. This assessment would be based on the following criteria, and would take into account information obtained, inter alia, in bilateral and multilateral surveillance:
(a) Very strong policies, underlying fundamentals, and track record: The member has a strong macroeconomic position, is implementing-and has a sustained track record of implementing very strong policies, and remains committed to maintaining such policies in the future, all of which give confidence that the member’s short-term external liquidity problems will be self-correcting. The member’s policies must have been assessed very positively by the Executive Board in the context of the most recent Article IV consultations. Relevant indicators for this purpose would be expected to include: (i) sound structural fiscal positions; (ii) low and relatively stable rates of inflation resulting from strong monetary policy implementation; (iii) effective financial sector supervision; (iv) sustainable current account positions; (v) capital accounts that are dominated by private flows; (vi) a history of steady access to international capital markets at favorable terms; and (vii) a reserve position that, despite growing balance of payments pressures, is relatively comfortable by standard measures.
(b) Sustainable debt: There is a high probability that the member’s external debt and public debt will remain sustainable, taking into account both the evolution of the level of debt and rollover and financing requirements under various scenarios and stress tests.
3. (a) Access by members to resources under this Decision will be subject to a cumulative limit of 500 percent of quota.
(b) Financing under this Decision will be made available to members in the form of outright purchases. The Fund may approve a purchase under this Decision only in cases where the member does not have a Fund arrangement in place at the time of the purchase.
(c) The Fund will not approve more than three purchases under this Decision for a member in any twelve-month period.
4. (a) The following procedures, and arrangements for consultations with the Executive Board, will apply following a member’s expression of interest in financial assistance under this Decision: (i) Staff will conduct a preliminary assessment of the member’s economic position and track record of policy implementation. Where support from other creditors is likely to be important in helping a member address its balance of payments difficulties, staff will consult with key creditors as appropriate. (ii) Once management decides that access to Fund resources under this Decision may be appropriate, it will consult with the Executive Board promptly in an informal meeting. For this purpose, Executive Directors will be provided with a concise staff note setting out the basis on which approval could be recommended under this Decision. (iii) When the Managing Director is prepared to recommend approval of a request for a purchase under this Decision, the relevant documents—including a short policy statement from the authorities, and a staff report that assesses the member’s qualification for financial assistance under the terms of this Decision—will be circulated to the Board as soon as possible. An assessment of the impact of the proposed purchase on the Fund’s finances and liquidity position will be included in the staff report. (iv) The Executive Board will generally be prepared to consider a request for a purchase under this Decision within 48 to 72 hours after the circulation of the documentation.
(b) Following a purchase and for as long as the member has any purchases outstanding under this Decision, staff will keep Executive Directors informed of relevant economic and financial developments concerning the relevant member.
(c) A member requesting a purchase under this Decision will provide authorization, by no later than the date of the purchase, for Fund staff to have access to the most recently completed annual independent audit of its central bank’s financial statements, whether or not the audit is published. This will include authorizing their central bank authorities and the central bank’s external auditors to discuss the audit findings with Fund staff, including any written observations by the external auditors regarding weaknesses observed in internal controls. Members will be expected to act in a cooperative manner during such discussions with the staff.
5. A member shall repurchase the outstanding amounts of its currency resulting from purchases under this Decision three months from the date of the relevant purchase.
6. (a) Purchases under this Decision and holdings resulting from such purchases shall be excluded for the purposes of the definition of reserve tranche purchase pursuant to Article XXX(c).
(b) Except for the purposes of determining the level of conditionality applied to purchases in the credit tranches, the Fund’s holdings of a member’s currency resulting from purchases under this Decision shall be considered separate from the Fund’s holdings of the same currency resulting from purchases made under any other policy on the use of the Fund’s general resources.
7. The rate of charge under Article V, Section 8(b) on holdings of a member’s currency acquired as a result of purchases under this Decision shall be (a) the rate of charge referred to in Rule I-6(4), as adjusted to cover deferred income or for placement to the Special Contingent Account (the “adjusted rate of charge”), for the portion of such holdings up to 200 percent of the member’s quota in the Fund; (b) 100 basis points per annum above the adjusted rate of charge, for the portion of such holdings in excess of 200 percent of the member’s quota in the Fund and up to 300 percent of such quota; and (c) 200 basis points per annum above the adjusted rate of charge, for the portion of such holdings above 300 percent of the member’s quota in the Fund.
8. The provisions of Decision No. 8165-(85/189) G/TR, December 30, 1985, except Section IV, shall apply to any overdue financial obligations arising under this Decision; provided however that the rate of charge on overdue repurchases shall be determined by the Fund and shall not be less than the maximum rate of charge specified in paragraph 7 of this Decision.
9. In order to carry out the purposes of this Decision, the Fund will be prepared to grant a waiver of the limitation of 200 percent of quota in Article V, Section 3(b)(iii), whenever necessary to permit purchases under this Decision or to permit other purchases that would raise the Fund’s holdings of the purchasing member’s currency above that limitation because of purchases outstanding under this Decision.
10. Whenever the total amount of outstanding purchases under this Decision exceeds SDR 60 billion, the Fund will promptly review the implications of this Decision for the Fund’s liquidity position.
II. Overall Cumulative Access Limits to the Fund’s General Resources
11. In Paragraph 2 of Decision No. 14064-(08/18), adopted February 22, 2008, the second sentence shall be amended to read as follows:
“Accordingly, overall access by members to the Fund’s general resources shall be subject to (a) an annual limit of 100 percent of quota, and (b) a cumulative limit of 300 percent of quota, net of scheduled repurchases; provided that these limits will not apply in cases where a member requests a purchase under the Short-Term Liquidity Facility, although outstanding holdings of a member’s currency arising from such purchases will be taken into account when applying these limits in cases involving requests for access under other Fund facilities.”
III. Post-Program Monitoring
12. In Paragraph 1 of Decision No. 13454-(05/26), adopted March 14, 2005, as amended, the first sentence shall be amended to read as follows:
“If outstanding credit to a member from the Fund’s General Resources Account (GRA), or from the Fund as Trustee of the Poverty Reduction and Growth Facility Trust (PRGF Trust), or a combination thereof, exceeds a threshold of 100 percent of quota, and the member does not have a program supported by a Fund arrangement or is not implementing a staff monitored program with reports issued to the Executive Board, or the member does not have a program supported by a Policy Support Instrument (PSI), the member will be expected to engage in Post-Program Monitoring (PPM) with the Fund of its economic developments and policies upon the recommendation of the Managing Director, provided that, for the purposes of calculating the member’s outstanding Fund credit, purchases under the Short-Term Liquidity Facility shall not be counted.”
IV. Emergency Financing Mechanism
13. The Emergency Financing Mechanism (EFM) procedures set forth in BUFF/95/102, 9/21/1995 shall not apply to requests for purchases under the Short-Term Liquidity Facility. (SM/08/324, Sup. 2, 11/3/08)
Decision No. 14184-(08/93),
October 29, 2008
Conversion of Emergency Assistance into a Special Policy
1. The Fund will be prepared to provide financial assistance to members who are afflicted by natural disasters or are in post-conflict situations. This assistance will be provided in accordance with the provisions of this decision and the guidelines on emergency assistance for natural disasters and post-conflict situations set out in: (i) pages 17 and 18 of EBM/82/16 (2/10/82); (ii) Summing Up by the Chairman—Fund Involvement in Post Conflict Countries—Executive Board Meeting 95/82, September 6, 1995 (BUFF/95/98 (9/19/95)); and (iii) Summing Up by the Acting Chairman—Fund Assistance to Post-Conflict Countries—Executive Board Meeting 99/38, April 5, 1999 (BUFF/99/48 (4/9/99)).
2. Purchases under this decision and holdings resulting from such purchases shall be excluded for the purposes of the definition of reserve tranche purchase pursuant to Article XXX(c).
3. Except for the purpose of determining the level of conditionality applied to purchases in the credit tranches, the Fund’s holdings of a member’s currency resulting from purchases under this decision shall be considered separate from the Fund’s holdings of the same currency resulting from purchases under any other policy on the use of the Fund’s general resources.
4. In order to carry out the purposes of this decision, the Fund will be prepared to grant a waiver of the limitation of 200 percent of quota in Article V, Section 3(b)(iii), whenever necessary to permit purchases under this decision or to permit other purchases that would raise the Fund’s holdings of the purchasing member’s currency above that limitation because of purchases outstanding under this decision.
Decision No. 12341-(00/117),
November 28, 2000
Concluding Remarks by the Chairman—Emergency Assistance—Natural Disasters Executive Board Meeting 82/16, February 10, 1982
The Chairman … made his final concluding remarks:
I think the best thing we can do at this stage is to note the support for the flexible practices that have been used in the past and have been incorporated in the language of Section III of the paper….
One of the advantages of the method already in use is that the management is allowed to exercise discretion and judgment on what constitutes a disaster serious enough to make a country eligible for emergency assistance from the Fund. The staff and management might miss some of the important points, but close contact with the Executive Directors concerned would enable them to receive good guidance on whether a given series of events crosses the threshold of disaster. Judgments will have to be made on the gravity of the situation, on the impact on the balance of payments, and on the type of help the Fund can offer the country in question. Such judgments would not fit easily into a set of rigid guidelines. The present language of Section III [below] seems appropriate, because it gives the staff and management general guidance while leaving them the necessary flexibility. In any event, it is the Board that will decide on each particular case. I am sure that the Board will be happy to have, not a legal document, but some guidelines to use as yardsticks in reaching those decisions.
III. Issues for Consideration by the Executive Board
The review of experience suggests that effective emergency assistance can continue to be provided to members afflicted by natural disasters through a flexible application of the existing policies on use of Fund’s resources. There is, therefore, no need in the staff’s judgment for establishing a new facility specifically addressed to cases of emergency. Executive Directors may wish to consider the following broad guidelines for the provision of emergency assistance to members afflicted by natural disasters.
(a) In most cases in which a member is afflicted by a natural disaster, effective assistance would continue to be provided by purchases under the compensatory financing facility or by stand-by and extended arrangements. However, in those cases where a member cannot meet its immediate financing needs arising from a major disaster, such as flood, earthquake, or hurricane, without serious depletion of its external reserves, emergency assistance in the form of quick outright purchases would continue, as in the past, to be provided under a flexible application of tranche policies.
(b) Emergency assistance is designed to provide only limited foreign exchange required for immediate relief. In the past, outright purchases for emergency situations were provided for relatively moderate amounts. In half of the cases, such purchases amounted to 25 percent of quota; in the remaining half, purchases ranged from 42–50 percent of quotas. On the basis of experience, the amount of resources would continue to be limited to the equivalent of one credit tranche, though larger amounts could be made exceptionally available. When need for additional financing is present, it would be best provided under the compensatory financing facility and within the framework of stand-by and extended arrangements.
(c) The amount of an emergency purchase would be taken into account in determining the size of any additional support under a subsequent stand-by or extended arrangement. Moreover, in order to avoid double compensation in cases where a member requests a CFF purchase subsequent to an emergency purchase, a determination would be made at the time of the CFF request of the part of export shortfall on which the CFF request is based that has already been compensated by the emergency purchase. In accordance with the procedures suggested in the Appendix, that part would be deducted from the calculated shortfall and an equivalent amount of the emergency purchase would be reclassified as a CFF purchase.
(d) In emergency situations, timing is crucial; quick assistance from the Fund can both provide relief and encourage financing from other sources. While in most instances, balance of payments difficulties will be transitory, understandings are needed to ensure that inappropriate policies do not compound the problems caused by the disaster. As in the past, a flexible and pragmatic approach will be followed to take into account the particular circumstances of the country, the nature and the extent of the disaster and the need to safeguard the revolving character of Fund resources.
(e) For purposes of emergency assistance requests, a member would be required to describe the general policies it plans to pursue, including its intention to avoid introducing or intensifying exchange and trade restrictions. The request will be granted when the Fund is satisfied that the member will cooperate with the Fund in an effort to find, where appropriate, solutions for its balance of payments difficulties. Frequently, at the time of the request of emergency assistance, members expressed an intention to devise adjustment programs in consultation with the Fund, but this intention was seldom carried out. To strengthen this aspect of the Fund’s emergency assistance, the member’s cooperation with the Fund in designing and adopting, when appropriate and as soon as circumstances permit, necessary adjustment measures would be one of the elements to be considered in the assessment of the requirement of cooperation associated with CFF purchases in the upper tranche. Such an approach would be applied so as to allow the assessment of cooperation to continue to be made on a pragmatic basis in the light of the nature of the difficulties and the circumstances of the member.
Summing Up by the Chairman—Fund Involvement in Post-Conflict Countries Executive Board Meeting 95/82, September 6, 1995
Directors in their majority endorsed the staff’s views on coordination among the various agencies and bilateral donors and creditors involved in assisting countries in post-conflict situations, and endorsed the suggestion to expand the scope of the present guidelines on emergency assistance to include such situations. However, a number of Directors expressed the need for great caution given the limited role the Fund can play in such circumstances.
Directors welcomed the early provision by the Fund of technical assistance and policy advice in its areas of expertise. In assessing the post-conflict cases reviewed in the paper, they noted that, in general, the Fund had been able to provide financial support at a relatively early stage, bearing in mind the need for adequate safeguards for use of the Fund’s resources.
Looking to the future, Directors emphasized the need for the Bretton Woods institutions, the regional development banks, the UN, and bilateral donors and creditors to coordinate closely in supporting countries emerging from conflict situations. They observed that, in the post-conflict cases reviewed, the process of coordination had benefited from the leadership of a single agency or bilateral partner, and that different agencies or countries had performed this role effectively in the various cases. Directors concurred that the institutional flexibility that has prevailed to date remained appropriate. While it was important that a lead be taken by one institution or donor, most Directors would not expect the Fund to be the lead institution. Directors were in broad agreement that coordination would be facilitated through an early preparation, where possible, by the affected member and the lead agency, in consultation with other relevant agencies and bilateral donors and creditors, of a framework paper for organizing technical assistance and financial support. Such a report could be similar to a policy framework paper, but less comprehensive, and with a shorter time horizon.
Most Directors thought that the Fund’s existing financial instruments were adequate to deal with some post-conflict situations, but that they may not be fully suitable, or available, in all cases that could merit Fund financial support. A majority of Directors endorsed the idea of expanding the scope of the present policy on emergency assistance to include carefully defined post-conflict situations. However, a number of other Directors saw no need for new policies in this area. In their view, experience had shown that the Fund was able to provide financial assistance when conditions were appropriate
Regarding the operational aspects related to the proposed expansion of the scope of emergency assistance, most Directors were disposed to endorse those proposed by the staff in post-conflict situations: where the country’s institutional and administrative capacity was disrupted as a result of the conflict, so that the member was not yet able to develop and implement a comprehensive economic program that could be supported by a Fund arrangement, but where there was nonetheless sufficient capacity for planning and policy implementation and a demonstrated commitment on the part of the authorities; where there was an urgent balance of payments need to help rebuild reserves and meet essential external payments and a role for the Fund in catalyzing support from other official sources; and where Fund support would be part of a concerted international effort to address the aftermath of the conflict situation in a comprehensive way.
Directors agreed that access to Fund resources in such cases should generally be limited to one credit tranche, and that the access policy under the existing emergency assistance guidelines provided sufficient flexibility to handle exceptional needs. Directors supported having a tranching of total resources in some instances to help ensure the effective use of Fund resources and provide an incentive to develop a comprehensive economic program. Most Directors agreed that the proposed Fund financial assistance for post-conflict countries be made available only if the member intended to move within a relatively short time frame to an upper credit tranche stand-by or extended arrangement, or to an arrangement under the enhanced structural adjustment facility (ESAF). Indeed, the use of emergency assistance should be framed in such a manner as to pave the way toward the adoption of a program that could be supported by such an arrangement.
For ESAF-eligible members, Directors recognized that concessional resources would be appropriate. For these members, most speakers indicated that they would favor the approach of seeking interest subsidies from bilateral donors on a case-by-case basis when Fund resources were provided under the emergency policy. Others, however, expressed caution about this approach.
Directors agreed that Fund assistance, and its conditionality, should be tailored to individual country circumstances, and should address the need to rebuild the administrative and institutional capacity required to put a comprehensive economic program in place. Accordingly, conditions would include a statement of economic policies; a quantified macroeconomic framework, to the extent possible; and a statement by the authorities of their intention to move as soon as possible to an upper credit tranche stand-by or extended arrangement, or to an ESAF arrangement. Part of the response must be a comprehensive technical assistance program, including institution-building aspects, and provision for its financing.
Overall, this has been a productive discussion of Fund involvement in post-conflict cases in which Directors have agreed on the fundamental—but generally not the leading—role of the Fund, regarding both cooperation with other international agencies and the parameters for Fund financial involvement through an expansion of the scope of the present policy on emergency assistance. While noting the caution expressed by a number of Directors, I would propose that we proceed to expand the scope of the emergency assistance policy on the basis outlined above. This summing up will provide the guidelines for this approach, it being understood that Fund support under an arrangement is the approach to be followed wherever this is possible, while, in the other cases, emergency assistance would be tailored to pave the way in this direction. Except as noted above, the provisions of the existing guidelines on emergency assistance will apply in post-conflict situations.
Summing Up by the Acting Chairman—Fund Assistance to Post-Conflict Countries Executive Board Meeting 99/38, April 5, 1999
Directors welcomed the opportunity to discuss ways to enhance Fund financial assistance to post-conflict countries, including those with arrears to international financial institutions, as requested by the Interim and Development Committees.
Most Directors observed that the existing policy guidelines have generally served Fund members well. In this regard, they noted that the Fund had provided technical assistance and macroeconomic policy advice at an early stage, and expressed satisfaction that the Fund’s financial assistance has been provided relatively quickly and had played a catalytic role in concerted international assistance efforts.
Directors therefore reaffirmed that the basic approach of the post-conflict emergency assistance policy continues to be a sound basis for the Fund’s involvement in post-conflict countries. Nevertheless, they noted that, within this framework, every effort should be made to enhance such assistance, and they welcomed the opportunity to consider the proposals put forward by the staff for this purpose. At the same time, Directors emphasized that, to be effective, any possible new steps by the Fund should be considered in the framework of substantially strengthened efforts on the part of the international community as a whole to ensure the maintenance of peace and to assist in the orderly transition from conflict to conditions conducive to stabilization and high quality growth. A few Directors suggested that enhanced assistance should also be available to countries struck by natural disasters.
Regarding the terms of emergency post-conflict assistance, Directors agreed that financial assistance on concessional interest rates would be more appropriate for low-income post-conflict countries than the General Resources Account (GRA) charges that currently apply to such assistance. In considering the four possible approaches discussed by the staff, Directors expressed a range of views.
Directors agreed that under any approach that involved the use of GRA resources, it would be essential to seek interest subsidies from bilateral donors on a case-by-case basis, with intensified efforts to mobilize these funds. In this regard, Directors called for an early indication of members’ readiness to contribute to subsidies, and endorsed the idea of establishing an administered account at the Fund.
While a new special facility within the GRA would deal with the maturity issue and would effectively address the concessionality issue if accompanied by a decision to lower charges or an agreement by donors to provide subsidies. There is not sufficient support for the establishment of such a facility. However, some Directors asked the staff to continue examining this approach, including the possibility of using income from purchases under the SRF to help subsidize the rate of charge on use of GRA resources.
There was support for the approach that would provide for early replacement of GRA resources by resources provided under the ESAF, when the member is in a position to obtain an ESAF arrangement. This would be an effective way of providing more financial support on appropriate terms to low-income post-conflict countries, as it would address both the concessionality and maturity issues. Directors also agreed that this would be consistent with the present purposes, structure, and conditionality of the ESAF as well as the prudential interest of ESAF creditors. They stressed that this procedure should not result in a weakening of ESAF conditionalities or a rationing of ESAF resources.
Most Directors considered that the provision of emergency assistance under the ESAF would represent an undesirable modification of the structure of the ESAF.
On access and length of the program period, Directors noted that most of the countries that have used emergency post-conflict assistance have been able to move to a Fund arrangement with upper credit tranche conditionality within a year or so of the approval of emergency assistance. However, such a rapid move may not always be possible or desirable, especially if economic and political conditions remain particularly fragile.
Hence, Directors agreed that in situations in which the rebuilding of institutions and reestablishing of policy implementation capacity is slow, despite the efforts of the authorities, and the member is not in a position to implement a Fund arrangement after about a year under a program supported by emergency assistance, and when there is sufficient evidence of the authorities’ commitment to reform and capacity to implement policies, additional access of up to another 25 percent of quota in the form of outright purchases could be provided. The additional 25 percent of quota would normally be tranched. A few Directors would have preferred smaller and/or more back-loaded disbursements, and a few would have preferred a larger initial amount. Directors noted that each purchase would need Board approval and would continue to be subject to satisfactory progress by the member in the rebuilding of capacity and macroeconomic stability. They emphasized that there should be continued stress on the catalytic role of the Fund, and that the Fund would be involved only as part of a concerted international effort, including technical support from other multilateral and bilateral agencies.
Directors indicated that the most difficult issue to address in considering the Fund’s post-conflict assistance policy was the situation of post-conflict countries that have large, protracted arrears to the Fund. At present, there are a small number of countries that could fall into this category. Special efforts to accelerate the provision of financial assistance by the Fund in such cases poses particular difficulties in relation to the Fund’s arrears strategy and could, if not carefully circumscribed, pose issues of moral hazard and undermine the Fund’s preferred creditor status.
In this regard, most Directors considered that, while there are a number of attractive features in the proposals put forward by the World Bank staff for post-conflict assistance for heavily indebted poor countries that are in arrears to multilateral institutions, they need to be considered from the perspective of the key issues for the Fund’s arrears policy: the principle of uniformity of treatment; payments to the Fund in the pre-arrears clearance period; length of the track record prior to arrears clearance; and the arrears clearance process and procedures for financing.
As to uniformity of treatment, Directors indicated that while it would be possible to make modifications to the arrears policy that could be applied to countries meeting specified post-conflict criteria, the application of those modifications could not discriminate among members by income level. Regarding the Fund’s approach of requiring a member to establish a strong track record of sound policy and adequate payments to the Fund at a minimum, remaining current on obligations falling due to the Fund and making every effort to reduce its arrears to the Fund. They generally believed that this approach had been effective in reducing the total amount of arrears and arrears cases, and in restoring normal relations with countries in a wide range of situations.
At the same time, Directors recognized that, in the pre-arrears clearance stage, competing claims from multilateral institutions for payments from heavily indebted post-conflict countries in arrears to these institutions may not be sustainable. In this regard, they supported the staff’s recommendation that the Fund consider relaxing its calls for payments as a test of cooperation, provided that the member is judged to be cooperating on policies and that all other multilaterals to which the member is in arrears take at least comparable action. Judgment as to the level of payment needed to sustain cooperation would be made on a case-by-case basis, taking into account the member’s debt servicing capacity.
Directors stressed that a solid track record is important to provide assurances that a member’s policy framework and commitment to sound policies are strong enough to ensure timely payments to the Fund in the future. In this light, it was generally agreed that a drastic shortening or elimination of the track record would not be desirable for the Fund or the international community more generally and that the current policy allows for sufficient flexibility in determining the appropriate length of the track record for post-conflict arrears countries.
With respect to arrears clearance, Directors stressed the need for consultation and coordination among creditors and donors in dealing with post-conflict cases. However, since the situations of these countries can vary widely, they endorsed a continuation of the case-by-case approach, which allows for sequential clearance of arrears to the international financial institutions in appropriate circumstances and the development of arrears clearance plans in individual cases, in coordination with other creditors.
In the absence of concessional financing for arrears clearance or rights encashment, Directors noted that arrears could likely be cleared through a bridge to a new arrangement in the GRA. They strongly reconfirmed their earlier views against the idea of the Fund matching rescheduling operations of the Paris Club or any other group of creditors, as being inconsistent with the monetary character of the Fund. Directors recognized, nonetheless, that there may be circumstances in which the Fund may need to consider exceptionally the use of the provisions of the Articles relating to postponement of repurchases and/or payment of GRA charges in domestic currency. This would need to be assessed as the countries neared the point at which arrears clearance operations would be appropriate and in the light of the circumstances of each case, including the financing requirements and financing possibilities available at that time.
Directors recognized that arrears clearance operations, through a bridge to a new arrangement in the GRA or postponement of repurchases and payment of charges in domestic currency, would not by themselves result in sustainable debt service positions for the heavily indebted post-conflict arrears countries. Hence, following clearance of arrears and the establishment of a satisfactory track record, the countries’ debt to the Fund and other creditors would be subject to action under the HIPC Initiative. This underscores the critical importance of marshaling concessional resources for the ESAF and the HIPC Initiative.
In light of today’s discussion, the staff will come back to the Board with proposals for appropriate modifications of existing policies, and with proposed decisions as necessary to give effect to the agreements on enhancing the Fund’s assistance to post-conflict countries. In the meantime, a joint Bank-Fund report will be prepared for the Interim and Development Committees on the status of the institutions’ consideration of these issues.
The Acting Chair’s Summing Up—The Fund’s Role in Low-Income Member Countries—Considerations on Instruments and Financing Executive Board Meeting 04/32, March 31, 2004
Directors welcomed the proposed changes for Emergency Post Conflict Assistance (EPCA), which would allow for both a longer duration for a member emerging from a conflict to build capacity with the support of EPCA, prior to moving to a Fund-supported program, and more frequent assessments of the member country’s policy performance.
Steps that might help achieve the right balance include:
- Amending the wording of the 1999 policy to indicate that a second tranche of 25 percent of quota could be made available when “the member is not in a position to implement a Fund arrangement after about a year or more under a program supported by emergency assistance”
- Extending the length of EPCA-supported programs, in total, to as long as three years with as much as 50 percent of quota (although no more than 25 percent of quota per year). Where it is expected that it will take a long time to rebuild capacity, there could be a stronger presumption that access to both the first and second phases of 25 percent of quota would be divided into two (or more) purchases over a longer program period and perhaps tapered over time.
- To help foster program implementation and to strengthen assurances to donors, supporting each purchase by a clear assessment of political commitment and the member’s progress in increasing its ability to implement a program and rebuilding administrative capacity.
- Consistent with a shift to more phased EPCA financing, extending the policy on safeguards assessments to cover members making use of EPCA resources.
- In cases where progress under the EPCA has proved to be insufficient for the member to move to a position where it is able to implement a PRGF arrangement, explicit consideration, in the next Article IV consultation following the expiration of the EPCA-supported program, of the appropriateness of (i) a staff-monitored program, or (ii) an explicit shift to a surveillance rather than program or pre-program relationship.
- For those that have achieved sufficient progress and are able to design and implement PRGF-supported programs, consideration should continue to be given to early replacement of emergency post-conflict assistance by concessional resources provided under the PRGF (by adjusting access appropriately). At an earlier discussion,1 Executive Directors stressed that this would be an effective way of providing more financial support on appropriate terms to low-income post-conflict countries, as it would address both the concessionality and maturity issues.
The Chairman’s Summing Up—The Role of the Fund in Low-Income Countries Executive Board Meeting 08/6, July 23, 2008
This has been a useful and constructive discussion. It has allowed us to take stock of the valuable contribution that the Fund has made to the progress of many low-income countries (LICs) toward macroeconomic and financial stability, which is central to sustained growth and poverty reduction. Our discussion has reconfirmed a broadly shared vision on the need for a continued close Fund engagement with its low-income member countries that is tailored to their changing needs and emerging new challenges. The Fund’s work on LICs will be shaped by its broader refocusing, and build on close collaboration with partner institutions.
Most Directors considered that the proposed mission statement outlines useful guiding principles for the Fund’s engagement in LICs. The statement affirms that the Fund aims to help LICs achieve the macroeconomic and financial stability needed to raise sustainable growth and have a durable effect on poverty reduction. While recognizing that the Fund’s mandate is similar in all member countries, many Directors suggested that the mission statement should better reflect the fact that at times different instruments and approaches are required when working with LICs given the particular characteristics of this group of countries. Many Directors considered that the objective of achieving strong, sustained growth should be an integral part of the policies which the Fund is helping LICs put in place, while others felt that the emphasis should rather be on stability as the platform upon which sustainable growth can be achieved. Directors agreed that the main channels for the Fund’s engagement will continue to be macroeconomic policy advice, capacity-building assistance, and concessional balance of payments support. On the latter, some Directors noted that the Fund is not a donor agency, and that its financing is relatively less concessional. A few Directors reiterated the view that LICs should not have to pay for capacity building assistance. As in other member countries, the Fund will focus on its core areas of expertise, namely, macroeconomic stabilization and fiscal, monetary, financial, and exchange rate policies, and the underlying institutions and closely related structural policies. The Fund’s work will draw on country-owned development strategies, and its advice and engagement will be tailored to the specific characteristics of countries. We will need to reflect further on how to take forward the issuance of a mission statement in light of the comments as well as suggestions for further refinement that were made today.
Directors welcomed the planned reviews of the Fund’s instruments to ensure that they continue to meet the evolving needs and priorities of LICs. The immediate priority will be to modify the Exogenous Shocks Facility (ESF), which has so far not been used, to make it a more effective instrument in helping LICs cope with shocks, including those arising from food and fuel price increases. Today’s discussion has raised a number of complex issues, on which we need to reflect further as we seek to adapt our instruments. This will involve careful examination of the merits of increasing the flexibility of the PRGF as the primary instrument for Fund financial engagement with LICs facing protracted balance of payments problems, including with respect to repayment schedules and the possibility of creating a precautionary window. The review of Fund facilities will also address proposals for increasing the fungibility of concessional resources across the Fund’s toolkit, and for a possible Stand-By-type instrument to support short-term stabilization in LICs. Most Directors did not see a role for Fund financing to offset shortfalls in aid.
… (BUFF/08/127, August 1, 2008)
Arrears to Creditors and Debt Strategy
Arrears to Creditors and Debt Strategy
The Executive Board has reviewed the Fund’s policy with respect to payments arrears. The Fund shall be guided by the approach in the conclusions set forth [below].
Decision No. 3153-(70/95),
October 26, 1970
4. Fund financial assistance to members having payments arrears should be granted on the basis of performance criteria or policies with respect to the treatment of arrears similar to the criteria or policies described in the preceding paragraph for the approval of the payments restrictions. In general, the understandings should provide for the elimination of the payments arrears within the period of the stand-by arrangement. Such understandings should be based on the concept of a given level of payments arrears and should be reflected in the performance criteria included in stand-by arrangements in the higher credit tranches. To support the policies designed to deal with arrears the letter of intent should include a statement that there would be no imposition of new restrictions or increase in the level of delayed payments. Where Fund financial assistance is being provided, but only through the first credit tranche, the adoption of a viable program directed toward the elimination of the payments arrears should be an important factor in considering whether the country was making reasonable efforts to redress its international financial situation.
Review of Fund Policies and Procedure on Payments Arrears Executive Board Meeting 80/154, October 17, 1980
Returning to the conclusions in EBS/80/190, [the Acting Chairman] observed that paragraph 3 seemed to be acceptable to Directors except for the final sentence, which could be changed to state that, depending on the member’s circumstances and the length of the program, it might not be feasible in the early stages of the program to go beyond an understanding that the member would try to avoid any further increase in outstanding arrears. As for the remainder of paragraph 3, Executive Directors appeared to agree that the staff should continue to be guided by the approach set forth in the Executive Board Decision No. 3153-(70/95).
The Fund’s policies on payments arrears are also concerned with their treatment in the context of stabilization programs supported by use of the Fund’s resources. In these programs, member countries are expected to take steps to reduce and eventually eliminate payments arrears relating to capital transactions as well as to payments and transfers for current international transactions. In formulating policy guidelines in these programs, the staff will continue to be guided by the approach set forth in the Executive Board decision of 1970 (Decision No. 3153-(70/95)), as quoted on page 12. This approach will also be followed with respect to payments arrears arising from default. The technique chosen by a member to reduce outstanding arrears will reflect its institutional arrangements, as well as the magnitude of the arrears and the severity of the balance of payments problem. When payments arrears are large in relation to a member’s available foreign exchange resources, it may not be possible to aim at the elimination of the arrears within the program period. Special arrangements may be needed for the renegotiation of outstanding debt obligations when debt problems are particularly severe. Depending on the member’s circumstances and the length of the program, it may not be possible, in the early stages of a program, to reach an understanding with the member that goes beyond requiring the avoidance of any further increase in arrears.
The Chairman’s Summing Up—Fund Involvement in Debt Strategy Executive Board Meeting 89/61, May 23, 1989
Directors stressed that in promoting orderly financial relations, every effort must be made to avoid arrears, which could not be condoned or anticipated by the Fund in the design of programs. …The Fund’s policy of nontoleration of arrears to official creditors remains unchanged. The debtor member would be expected to continue to treat creditors on a nondiscriminatory basis. …
The Acting Chairman’s Summing Up on Fund Policy on Arrears to Private Creditors—Further Considerations Executive Board Meeting 99/64, June 14, 1999
Directors welcomed the opportunity to reexamine the criteria set out earlier for Fund lending into arrears to private creditors stemming from sovereign defaults and from the imposition of exchange controls that lead to an interruption in debt-service payments by nonsovereign borrowers.
Directors emphasized that the modification of the financing assurances and arrears policies to permit lending into arrears is an adaptation of existing policies to changing circumstances, and is intended to reinforce the Fund’s ability to promote effective balance of payments adjustment while providing adequate safeguards for the use of the Fund’s resources.
Directors concurred that the criteria set out earlier for the case of sovereign arrears may be too restrictive and could lead to instances in which creditors particularly bondholders could exercise a de facto veto over Fund lending. They also considered that the criteria set out earlier for the case of nonsovereign arrears are too restrictive, as they may not take adequate account of the possibility that, even when both creditors and debtors are willing to participate in collaborative negotiations, the process of debt renegotiation may be protracted. Directors noted that in the case of nonsovereign arrears to private creditors, it would be important to ensure that appropriate steps are taken to protect creditors’ interests. One suggestion to staff in this regard was to consider the establishment of an escrow account into which debt-service payments in local currency to nonresident creditors would be made. Against the background of variations in institutional arrangements and members’ capacity, however, Directors considered that it would be difficult to specify as a criterion for lending into nonsovereign arrears the implementation of specific mechanisms to protect creditors’ interests; instead, this judgment would need to be made on a case-by-case basis.
Directors agreed that Fund lending into sovereign arrears to private creditors (including bondholders and commercial banks) should be on a case-by-case basis and only where:
- (i) prompt Fund support is considered essential for the successful implementation of the member’s adjustment program; and
- (ii) the member is pursuing appropriate policies and is making a good faith effort to reach a collaborative agreement with its creditors.
Directors agreed that Fund lending into nonsovereign arrears stemming from the imposition of exchange controls should be on a case-by-case basis and only where:
- (i) prompt Fund support is considered essential for the successful implementation of the member’s adjustment program; and
- (ii) the member is pursuing appropriate policies, is making a good faith effort to facilitate a collaborative agreement between private debtors and their creditors, and a good prospect exists for the removal of exchange controls.
In both cases, all purchases by the member would be subject, as provided at present, to financing reviews to bring developments at an early stage to the attention of the Executive Board, and to provide an opportunity for the Board to consider whether adequate safeguards remain in place for further use of the Fund’s resources in the member’s circumstances. Specifically, such reviews would provide a basis to assess whether the member’s adjustment efforts are considered to be undermined by developments in creditor-debtor relations.
Directors noted that the policy outlined above supersedes all previous policies regarding lending into arrears to private creditors.
Finally, Directors noted that it would be important to monitor experience with lending into arrears and to keep the policy outlined above under review, so as to ensure that it achieves its objectives.
The Acting Chair’s Summing Up—Fund Policy on Lending into Arrears to Private Creditors—Further Consideration of the Good Faith Criterion Executive Board Meeting 02/92, September 4, 2002
Directors agreed that the Fund’s policy on lending into sovereign arrears to private creditors continues to provide a useful tool enabling the Fund to support a member’s adjustment efforts before it has reached agreement with its private creditors on a debt restructuring. The pillars of this policy are first, that the timely support of the member’s adjustment program is considered essential to help limit the scale of economic dislocation and preserve the economic value of investors’ claims; and second, that the debtor engages its creditors in an early and constructive dialogue to help secure a reasonably timely and orderly agreement that would help the country regain external viability.
Directors welcomed the opportunity to review the application of the criterion requiring a member to make good faith efforts to reach a collaborative agreement with its creditors, in light of the experience with bond restructurings since the introduction of the “good faith” criterion in 1999. They observed that this experience, although limited, suggests that notwithstanding the ability of debtors to reach restructuring agreements with their creditors, the restructuring processes have in some cases been protracted, reflecting the complexity of each individual case, as well as different perspectives and concerns among debtors and creditors. Against this backdrop, Directors agreed that greater clarity about the good faith dialogue between a debtor and its creditors during the restructuring process could help provide better guidance about the application of the lending into arrears policy and, more generally, promote a better framework for the engagement of debtors and creditors in the restructuring of sovereign debt. Greater clarity concerning the framework for possible debt restructuring would strengthen the capacity of investors to assess recovery values under alternative scenarios, thereby facilitating the pricing of risk and improving the functioning of the capital markets. At the same time, however, Directors stressed the need for continued flexibility in applying the “good faith” criterion to accommodate the characteristics of each specific case; to avoid putting debtors at a disadvantage in the negotiations with creditors; and to avoid prolonged negotiations that could hamper the ability of the Fund to provide timely assistance. Indeed, any clarification of the “good faith” criterion should serve primarily to support the difficult judgments that will continue to have to be made in each case, and should be made operational in a manner that does not impair market discipline.
Directors considered that the following principles would strike an appropriate balance between clarity and flexibility in guiding the dialogue between debtors and their private external creditors.
• First, when a member has reached a judgment that a restructuring of its debt is necessary, it should engage in an early dialogue with its creditors, which should continue until the restructuring is complete.
• Second, the member should share relevant, non-confidential information with all creditors on a timely basis, which would normally include:
- an explanation of the economic problems and financial circumstances that justify a debt restructuring;
- a briefing on the broad outlines of a viable economic program to address the underlying problems and its implications on the broad financial parameters shaping the envelope of resources available for restructured claims; and
- the provision of a comprehensive picture of the proposed treatment of all claims on the sovereign, including those of official bilateral creditors, and the elaboration of the basis on which the debt restructuring would restore medium-term sustainability, bearing in mind that not all categories of claims may need to be restructured.
• Third, the member should provide creditors with an early opportunity to give input on the design of restructuring strategies and the design of individual instruments.
In discussing the various approaches that would best clarify the content of a member’s good faith efforts in the context of the lending into arrears policy, Directors emphasized that the modalities guiding the debtor’s dialogue with its creditors will need to be tailored to the specific features of each individual case. Most Directors considered that the third approach suggested in the staff paper for refining the good faith criterion provides an appropriate basis for the implementation of the Fund’s policy, while retaining sufficient flexibility to address the diversity of individual situations. Although, as a general premise, the form of the dialogue would be left to the debtor and its creditors, under this approach a member in arrears would be expected to initiate a dialogue with its creditors prior to agreeing on a Fund-supported program consistent with the principles discussed above. In cases in which an organized negotiating framework is warranted by the complexity of the case and by the fact that creditors have been able to form a representative committee on a timely basis, there would be an expectation that the member would enter into good faith negotiations with this committee, though the unique characteristics of each case would also be considered. This formal negotiating framework would include, inter alia, the sharing of confidential information needed to enable creditors to make informed decisions on the terms of a restructuring (subject to adequate safeguards), and the agreement to a standstill on litigation during the restructuring process by creditors represented in the committee. By the same token, in less complex cases, where creditors have not organized a representative committee within a reasonable period, or where for other reasons a formal negotiation framework would not be effective, the member would be expected to engage creditors through a less structured dialogue. Directors stressed that, in going forward with the suggested approach, it would be crucial to strike the appropriate balance between the need to promote effective communication between a debtor and its creditors, and the need to retain flexibility to address the diversity of individual country circumstances.
Directors discussed a variety of factors that would need to be considered in making the proposed framework operational. They emphasized that in assessing whether the member is making good faith efforts to negotiate, judgments would continue to be required in a number of important areas. These include a consideration of the complexity of the restructuring case, the extent to which a creditor committee is sufficiently representative, and whether a reasonable period has elapsed to allow for the formation of a representative committee. Directors viewed the considerations laid out in the staff paper as useful inputs for helping to make such judgments, which would need to be made flexibly. They also noted that to the extent that negotiations become stalled because creditors are requesting terms that are inconsistent with the adjustment and financing parameters that have been established under a Fund-supported program, the Fund should retain the flexibility to continue to support members notwithstanding the lack of progress in negotiations with creditors. In this connection, it was stressed that decisions on an adequate macroeconomic framework that could form the basis for the Fund’s lending into arrears will remain in the sole purview of the Fund.
Directors recognized that there may be circumstances where, following a default, the debtor enters into good faith discussions with creditors prior to the approval of a Fund arrangement. In these circumstances, creditors are likely to express views as to the appropriate dimensions of the program’s adjustment and financing parameters. While such input would be welcome, Directors emphasized that it would be inappropriate for private creditors to be given a veto over the design of the financing plan or the design of the adjustment program.
All purchases made while a member has outstanding arrears to private creditors will continue to be subject to financing reviews, which will provide an opportunity for the Fund to monitor relations between a debtor and its creditors, and for the Board to be kept informed about developments in this area at an early stage. Going forward, a number of Directors also underscored the importance of strengthening debtor-creditor dialogue in good times, as this will provide a good base for advancing the required negotiation framework in times of stress.
Fund’s Policy on Lending into Arrears
5. The Fund decides that the deadline for the next review of the Fund’s policy on lending into arrears prescribed by Decision No. 13814-(06/98), adopted November 15, 2006, shall be extended to end-December 2008. (SM/07/394, 12/21/07)
Decision No. 14036-(08/01),
December 27, 2007
Summing Up by the Chairman—Management of the Debt Situation Executive Board Meeting 91/48, April 3, 1991
Turning to the modalities of Fund support for debt operations, Directors saw no need for substantial modifications to the guidelines which, implemented in close collaboration with the World Bank, continue to provide the required versatility. They noted, however, the need to strengthen existing safeguards to ensure that linkages to Fund arrangements in commercial bank agreements do not adversely affect the interests of member countries or the Fund. In this regard, they observed that “condition precedent” clauses, linking bank disbursements to purchases from the Fund, should be discouraged where feasible and accepted only when necessary to obtain satisfactory bank financing agreements in concerted financing cases. In addition, they stressed that “mandatory prepayment” clauses in future bank agreements should be structured so as clearly to avoid linking bank prepayments to early repurchases made pursuant to expectations or obligations established by the Fund. Directors emphasized that these safeguards should be taken into account by member countries as early as possible in their negotiations with bank creditors. In that connection, a number of Directors observed that debtors and creditors should be aware of what the Fund can accept and, in the same vein, that members should inform the staff at an early stage, and well ahead of agreement with bank creditors, about envisaged linkages to Fund arrangements in bank packages.
Summing Up by the Acting Chairman—Settlement of Disputes Between Members Relating to External Financial Obligations—Role of the Fund Executive Board Meeting 84/99, June 22, 1984
There was a strong consensus on three general matters relating to the use of the Fund’s good offices. First, in the light of the Fund’s primary responsibilities concerning the international monetary system and of its specific authority under the Articles to provide financial and technical services, management and staff should stand ready to use their good offices in helping members engaged in a particular dispute over an external financing obligation. Second, such good offices should, however, be limited in scope and frequency, although in that connection there were differences in emphasis among Directors. Some felt that the Fund should be more active, others that the Fund must be quite cautious. In short, the use of good offices should be consistent with available resources and should be substantially technical. Third, all Directors attached great importance to the Fund’s remaining neutral in issues of debt dispute. It should be clearly understood that the Fund’s good offices were meant to bring the parties to a dispute together. Fourth, there was agreement that the Fund should act in such cases only if both parties wished to have the Fund provide its good offices.
Access Policy and Limits in the Credit Tranches and Under the Extended Fund Facility and on Overall Access to the Fund’s General Resources, and Exceptional Access Policy—Review
1. The Fund has reviewed the guidelines and the limits for access by members to the Fund’s general resources in the credit tranches and under the Extended Fund Facility set forth in Decision No. 13462-(05/32), adopted April 1, 2005, as amended, and decides that they remain appropriate in the present circumstances. Accordingly, subject to paragraph 2 below, access by members to the Fund’s general resources in the credit tranches and under the Extended Fund Facility shall be subject to (a) an annual limit of 100 percent of quota, and (b) a cumulative limit of 300 percent of quota, net of scheduled repurchases. These limits shall not be regarded as targets. Within these limits, the amount of access in individual cases will vary according to the circumstances of the member in accordance with criteria established by the Executive Board.
2. The Fund has reviewed the guidelines and the limits for overall access by members to the Fund’s general resources set forth in Decision No. 13462-(05/32), adopted April 1, 2005, as amended, and decides that they remain appropriate in the present circumstances. Accordingly, overall access by members to the Fund’s general resources shall be subject to (a) an annual limit of 100 percent of quota, and (b) a cumulative limit of 300 percent of quota, net of scheduled repurchases; provided that these limits will not apply in cases where a member requests a purchase under the Short-Term Liquidity Facility, although outstanding holdings of a member’s currency arising from such purchases will be taken into account when applying these limits in cases involving requests for access under other Fund facilities. The Fund may approve access in excess of the limits set forth in this decision in exceptional circumstances, provided that, at a minimum, the four substantive criteria set forth in BUFF/02/159 (9/20/02) would need to be met to justify such access for members facing a capital account crisis. The procedures set forth in BUFF/02/159 (9/20/02), BUFF/03/28 (3/5/03) and BUFF/05/68 (4/13/05) shall apply to all cases involving access in excess of the limits set forth in this decision, and requests for such access in cases of members not facing a capital account crisis shall be justified in light of the four substantive criteria set forth in BUFF/02/159 (9/20/02).
3. The guidelines for access, the access limits set forth in this decision, and the experience with access in amounts exceeding these limits shall be reviewed no later than 2/21/2013, on the basis of all relevant factors, including the magnitude of members’ balance of payments problems and developments in the Fund’s liquidity. (EBS/08/15, 2/1/08)
Decision No. 14064-(08/18),
February 22, 2008,
as amended by Decision No. 14184-(08/93),
October 29, 2008
II. Considerations Governing Amount of Access
Under the decision on enlarged access, a request for the Fund’s resources will be met only if the Fund is satisfied that the payments imbalance that the member faces is large in relation to its quota, that the member’s financing need from the Fund exceeds the amount available to it in the credit tranches or under the Extended Fund Facility, and that its problem requires a relatively long period of adjustment and a period of repurchases longer that three to five years. The decision further states that the period of a stand-by arrangement involving enlarged access will normally exceed one year and may extend to three years, and the period of an extended arrangement will be normally three years. In practice the Fund has considered successive one-year stand-by arrangements, formulated within a medium-term strategy of steady progress toward a sustainable balance of payments position to be consistent with this decision, when the amount of the arrangement is greater than that available in the credit tranches.
The considerations that need to be taken into account in determining the amount of access in individual arrangements and current practice on access have been discussed in recent staff papers, in particular in EBS/83/132 (6/27/83), and may be briefly recapitulated here. The first important consideration is the member’s actual or potential need for resources from the Fund, taking into account other sources of financing and the desirability of maintaining a reasonable level of reserves; in no circumstances can access be greater than this need. The second important consideration stems from the need to preserve the revolving character of the resources that the Fund provides, i.e., the ability of the member to service its indebtedness to the Fund. In determining the case for Fund support and the amount involved, the timing and extent of the expected improvement in the member’s balance of payments are relevant factors. It follows that adjustment policies in support of which the Fund’s resources are to be used must be designed and implemented in such a manner as to lead to a strengthening of the balance of payments by the time the repurchases begin to fall due and of a sufficient extent to allow the member to make the repurchases without strain. Finally, the amount of the member’s outstanding use of Fund credit and its record in using Fund resources in the past must enter into the judgment on the appropriate scale of further use of the Fund.
Under the policy on enlarged access, repurchases of borrowed resources begin three and one half years after the purchase, whether under a stand-by or extended arrangement. Repurchases of ordinary resources under a stand-by arrangement must be made during the regular three- to five-year period after the purchase, while repurchases of ordinary resources under an extended arrangement must be made during a four- to ten-year period after the purchase. For standby arrangements, it should therefore be expected that substantially all adjustment measures would be implemented at an early stage and there would be significant progress to balance of payments viability by the end of the three years, in order that repurchases could be made as scheduled.
To ensure that the program allows repurchases to be made, a balance of payments projection well into the repurchase period must show that progress toward a viable balance of payments position is being achieved. This can be indicated by a diminishing need for exceptional finance in general, and that to be provided by the Fund in particular, over the period. The policy measures already in place or being introduced must be commensurate with those needed to continue this progress at the required rate. This subject is discussed in the recent paper reviewing upper credit tranche stand-by arrangements and conditionality (EBS/83/215, 10/4/83).
These basic principles have to be applied in a flexible way because of the great variety of the member’s circumstances and the uncertainties that attend economic projections and programming. Access at or close to the annual limit of 102 percent of quota is justified where the member’s outstanding use of the Fund’s resources is not large, where the member has undertaken a comprehensive adjustment program adequate to bring about a rapid turnaround in the balance of payments, and where the Fund is satisfied that on the basis of the member’s past record and its present circumstances, it has the ability and willingness to implement the program. The Fund support might appropriately be given in the form of an extended arrangement in some of these cases. Substantial Fund financing may frequently be a critical element in restoring confidence of the international financial community in the policies of the country and thus reviving capital flows.
In these cases where the member has an especially large need for financing from the Fund, and where, based on all relevant information, the strength of the adjustment effort is such that the balance of payments improvement will be quick, sufficient, and durable, Fund financing could exceed the 102 percent limit and reach up to the 125 percent limit. Moreover, as reaffirmed by the Interim Committee, the Fund should have the flexibility in exceptional cases of going beyond the latter limit.
The Fund has recognized that even full implementation of a program or programs may not necessarily guarantee the achievement of the desired balance of payments outcome; moreover, even if the outcome were to turn out to be fully as planned, new problems could arise before repurchases were completed, calling for a supplementary adjustment effort. The Fund should continue to have the flexibility to provide financial support in these circumstances, even though this might prolong the period of use of its resources by a member. This policy approach is implicit in the fact that the cumulative limit allows additional Fund financing even when a member has obtained the maximum possible amount of support for a period of three years.
There are also circumstances where it is clear at the outset that the adjustment period will have to be stretched beyond three years. In these cases Fund support should normally be in the form of successive shorter-term stand-by arrangements, each arrangement being formulated within the framework of a medium-term strategy of balance of payments adjustment. In view of the possible association of the Fund over a number of years, Fund financing in each individual year should be in moderate amounts, that is, well below the limit of 102 percent. Moreover, such support must be associated with the prospect of a significant reduction in balance of payments pressures within a reasonable period so that the member will be in a position to make the repurchases on schedule and in less straitened circumstances than when the corresponding drawings were made.
In a quite different category are situations where the Fund’s role is likely to be primarily that of a catalyst. The weakness of a member’s balance of payments may be such that it is questionable whether a sustainable position not requiring exceptional finance can be achieved over the medium term. A principal factor causing this weakness is often the existing burden of debt service. In some of these cases the debt service problem may be due in part to the large outstanding use of the Fund by the member and further substantial purchases from the Fund would only aggravate the difficulties. In other cases, a substantial improvement in the balance of payments may call for fundamental economic changes which cannot be achieved within a medium-term time frame. In all these situations Fund financing on a limited scale is justified if the member is taking appropriate steps to deal with its situation and such support will maintain the confidence of other creditors. The great bulk of the external financing must normally be provided on appropriate terms from sources other than the Fund. If sufficient external financing cannot be obtained, the Fund cannot be the residual source of finance, and there would thus be no basis for the Fund to support the adjustment program. The amount of the financing need that can be met from the Fund must be closely related to the expected rate of improvement in the overall balance of payments, and there should be a clear prospect of the member making net repurchases with a view to restoring its credit tranche position, thus preventing the use of Fund resources acquiring a semipermanent character.
Summing Up by the Acting Chair—Access Policy in Capital Account Crises Executive Board Meeting 02/94, September 6, 2002
Directors welcomed the opportunity to consider elements of a strengthened framework for the policy on exceptional access to the Fund’s resources—i.e., access that exceeds the limits under the credit tranches and the Extended Fund Facility (EFF). Our discussion today has focused particularly on access policy and crisis resolution in cases where a combination of adjustment and financing is likely to be sufficient to put a country on a stable medium-term path. In some other cases, a restructuring of private claims may be necessary. Our work on ways to strengthen the framework for debt restructurings—including the sovereign debt restructuring mechanism and the contractual approach—and clarifying the lending into arrears policy are separate strands for developing the crisis resolution strategy. Access policy is also closely related to our ongoing discussions on the size of the Fund, and the Twelfth General Review of Quotas, with a number of Directors noting that progress on this issue, including on the distribution of quotas, would help to address some of the concerns about exceptional access.
Directors discussed the exceptional access policy in the context of the Fund’s response to the challenges arising from the increasing integration of global financial markets in the last decade. This integration has helped to support a rapid expansion of investment and activity in many emerging market countries, but has also exposed these countries to crises caused by rapid reversals of capital flows. The Fund has responded to the challenges posed by these modern capital account crises by strengthening its crisis prevention capabilities and, in some cases, by helping meet members’ unusually large financing needs. Directors agreed that exceptional access will sometimes be necessary if the Fund is to provide meaningful assistance to members facing a capital account crisis, but that the policies on such access need to be strengthened to ensure that it remains exceptional. In this context, some Directors noted that the exceptional circumstances clause may continue to be needed occasionally also for balance of payments problems in the current account.
Our discussion today has been informed by the experience gained in past exceptional access cases, beginning with Mexico’s Stand-By Arrangement (SBA) in 1995. Several of the programs supported by exceptional access have been quite successful in helping the member achieve external viability, resume growth with limited vulnerability, and regain access to private markets, although more slowly than at first expected. In other countries, however, the combination of adjustment and exceptional access in the context of the associated political and external environment was not sufficient to avoid a restructuring of obligations. It was noted, however, that in all cases the borrowing members have remained current on their repayment obligations to the Fund. From a broader perspective, Directors also noted that, while some moral hazard is bound to be present in Fund lending, there is little evidence that the use of exceptional access in general has had large effects on moral hazard by increasing investor or country risk-taking.
Directors agreed that more clearly defined criteria regarding the appropriate use of exceptional access in capital account crises are needed to help shape the expectations of members and markets, provide a benchmark for difficult decisions regarding program design and access, safeguard Fund resources, and ensure uniformity of treatment of members. Directors generally considered that (at a minimum) the following criteria would need to be met to justify exceptional access for members facing a capital account crisis:
(i) The member is experiencing exceptional balance of payments pressures on the capital account resulting in a need for Fund financing that cannot be met within the normal limits;
(ii) A rigorous and systematic analysis indicates that there is a high probability that debt will remain sustainable;
(iii) The member has good prospects of regaining access to private capital markets within the time Fund resources would be outstanding, so that the Fund’s financing would provide a bridge; and
(iv) The policy program of the member country provides a reasonably strong prospect of success, including not only the member’s adjustment plans but also its institutional and political capacity to deliver that adjustment.
In discussing the aforementioned criteria, Directors emphasized in particular the importance of rigorous debt sustainability analyses to support requests for exceptional access. Several Directors saw scope for further strengthening the criteria so as to ensure their strict application. Directors underscored the importance of involving the private sector for program success, and a number of them expressed the view that the member’s best efforts to secure private sector involvement in program financing should be an important consideration for justifying exceptional access.
A few Directors suggested further narrowing the definition of capital account crises that could warrant exceptional access by establishing a formal criterion relating to problems of contagion or the potential for systemic effects. Many other Directors, however, considered that such a criterion could create a bias toward higher access for larger members, which could not be reconciled with the principle of uniformity of treatment. Directors recognized that the Fund should be prepared to provide access above the normal limits in cases where the member’s problems have regional or systemic implications, when the other criteria are met.
Directors concurred that the member’s balance of payments needs remain a key criterion in determining access in individual cases, while recognizing that measurement of need in financial crises is subject to an unusual degree of uncertainty. Stocks of financial claims can be very large, and can potentially translate into a large balance of payments need. In this context, several Directors highlighted the limitations of the gross financing needs variable, which is a commonly reported measure of need in Fund-supported programs.
A number of Directors noted that, in capital account crises, access in percent of quotas has varied widely, partly because, for some members, the quota may not reflect the relative size of the economy and/or their integration into international capital markets. Most Directors considered, nevertheless, that quotas should remain the fundamental metric for access. Many Directors recognized that alternative metrics, such as GDP, exports, gross reserves, and calculated quotas, could provide additional perspectives on the scale of access in individual cases, even though they would not give unequivocal guidance. In this light, a few Directors recommended that further work be done to support assessments of the appropriate scale of access in more detail.
Most Directors agreed that even when the need was large, Fund financing in exceptional access cases had in practice covered only a portion of the gross financing need, with financing from the private sector and from other official sources filling the balance. Directors emphasized that efforts to involve private sector creditors in program financing should be continued, but it was also recognized that concerted or involuntary action by such creditors could be associated with a slow return of confidence and market access. Several Directors encouraged further consideration of the role of private sector involvement in exceptional access cases.
Directors supported strengthening the procedures for decision making on access proposals above the normal access limits to provide additional safeguards and enhance accountability, and the Board agreed to the following measures:
(i) Raising the burden of proof required in program documents as set out in the staff paper. This would include thorough discussion of need and the proposed level of access, a rigorous analysis of debt sustainability, and an assessment of the risks to the Fund arising from the exposure and its effect on liquidity;
(ii) Formalizing requirements regarding early Board consultation on the status of negotiations in exceptional access cases. The modalities of the Board’s involvement will be further worked out, building on the practice under which the Board has confidential briefings on the broad strategy of the program and the case for access above normal limits before negotiations are concluded; and
(iii) Requiring an ex post evaluation by the staff of programs supported by exceptional access within a year after the end of the arrangement, with a number of Directors suggesting that the Independent Evaluation Office also consider conducting such evaluations.
Directors also considered the possibility of establishing a presumption of public disclosure of Fund staff reports on programs supported by exceptional access. A majority of the Board held the view that, in particular in these cases, there would be a high premium on increasing public understanding and credibility of the program strategy. Many other Directors, however, were concerned that moving to a presumption of publication of such staff reports might not be easily reconcilable with the need for frank assessments of the risks involved. Directors agreed to return to this issue on the occasion of the next review of the Fund’s transparency policy in June 2003.
Directors discussed the possibility of requiring a supermajority of Board votes to approve exceptional access. They generally agreed that such a fundamental change to the governance structure of the Fund—which would necessitate a change in the Articles of Agreement—should not be pursued at this time. A few Directors were in favor of separating Board decisions on exceptional access from the approval of the program. Several Directors noted, however, that the merits of the access proposal could not be considered independently from the program, and cautioned against procedures that could slow the approval process. Directors discussed the possibility of introducing a presumptive limit on cumulative exceptional access to provide an additional restraint on the use of the Fund’s resources. Directors were opposed to the establishment of such a limit, noting that it could not preclude access above this limit without fundamentally constraining the Fund’s capacity to respond to crises in its member countries where access above the high limit might be justified. They also pointed to a number of difficult practical hurdles that a limit or norm on exceptional access would raise, in particular, the problem of choosing the right level for a high limit, and the complexity of rules that would need to be defined around a two-tier system of access limits. Furthermore, some Directors were concerned that a presumptive access limit or norm would only be credible to the extent that it was adhered to. Past decisions on high access above the limits considered would make it more difficult to establish credibility.
Turning to prudential considerations regarding exceptional access cases, Directors agreed that more systematic and comprehensive information regarding the member country’s capacity to repay the Fund and the Fund’s exposure to the member country is needed to underpin judgments about the appropriateness of the proposed access levels in individual cases. In this context, Directors also considered setting a maximum absolute exposure level for a single member above which additional precautionary balances would immediately be accumulated through the burden-sharing mechanism. While a few Directors saw merit in such a proposal, most Directors opposed this idea, as it would raise difficult issues regarding the uniformity of treatment of members in terms of access. They were also concerned that using the burden-sharing mechanism could signal a lack of confidence of the Fund in the member country’s economic program and ability to repay the Fund. Some Directors called for an increase in quotas to provide the Fund with adequate resources to deal with the new type of crises.
Directors also had a preliminary discussion of possible changes in the terms and conditions of Fund lending above the limits to affect incentives that apply to exceptional access cases. Most Directors agreed that the scope for increasing the rate of charge to discourage exceptional access appears limited. A number of Directors were of the view that, since some capital account crises are unlikely to reverse as quickly as foreseen in the Supplemental Reserve Facility (SRF), lending at somewhat longer maturities should be available if the Fund is to contribute effectively in some of these cases. Other Directors, however, cautioned that such proposals could blur the distinction between SRF and SBA resources, and would warrant a fuller review. Many Directors also expressed interest in further considering the establishment of a presumption that SRF resources would be used when the cumulative access exceeds the limits under the credit tranches and the EFF. A few Directors also noted the importance of the policy on early repurchases in this context.
The current discussion has been fruitful in developing consensus in a number of areas. Staff will prepare a follow-up paper before the end of the year on how best to put this new framework in place, including procedures for early Board consultation in cases where exceptional access is considered, and issues related to private sector involvement in these cases. This paper will also include further consideration of the appropriate maturity of Fund lending in capital account crises, and of the related issue of the mix between SRF and SBA resources. At that discussion, the Board will also conduct the regular review of access policy under the credit tranches and the EFF.
The Acting Chair’s Summing Up—Review of Access Policy Under the Credit Tranches and the Extended Fund Facility, and Access Policy in Capital Account Crises—Modifications to the Supplemental Reserve Facility and Follow-Up Issues Related to Exceptional Access Policy Executive Board Meeting 03/16, February 26, 2003
Directors welcomed the opportunity to review the recent application of the Fund’s access policy, as well as proposals to make operational the Fund’s new strengthened framework for exceptional access in capital account crises. Together with the summing up of our discussion on September 6, 2002, this summing up will provide a new framework that will help ensure that exceptional access remains exceptional, while retaining the Fund’s flexibility to provide adequate assistance to members facing a capital account crisis. The Board also decided to maintain the current access limits in the credit tranches.
Access Policy in Capital Account Crises—Modifications to the Supplemental Reserve Facility and Issues Related to Exceptional Access Policy
Regarding the policy on access in capital account crises, Directors discussed a number of operational aspects of the new framework whose building blocks were endorsed at their discussion on September 6, 2002. As noted at that time, the new framework establishes four substantive criteria guiding decisions on when exceptional access may be appropriate in capital account crises—events characterized by a sharp loss of investor confidence and large and disorderly outflows of capital. Directors stressed that the effectiveness of the exceptional access policy will critically depend on the consistent and rigorous application of these criteria. Directors took note of the further staff papers planned on the capacity of countries to access financial markets after debt restructuring, and on initial experience with the debt sustainability analysis.
The new framework also sets out stronger procedures for decision-making on exceptional access proposals. These procedures include increasing the burden of proof in program documentation, early and more formal Board consultations on program negotiations in exceptional access cases, and, as a rule, ex post evaluation of programs with exceptional access within one year of the end of the arrangement. Directors agreed that these procedures would apply to any exceptional access (i.e., access under any facility that exceeds the limits applying in the credit tranches and the Extended Fund Facility), even when the member is not experiencing a capital account crisis.
Directors saw a more formal process for Executive Board consultation at the early stages of program discussions as helpful for reinforcing careful and systematic decision-making on exceptional access cases. At the same time, however, they recognized the constraints imposed by the special circumstances under which exceptional access programs are negotiated. In particular, these programs are frequently negotiated over a very short time with a backdrop of a worsening crisis, where new information and developments may require substantial changes in the program at very short notice. Directors also agreed that management and staff should have sufficient flexibility and discretion in coming to an agreement in crisis situations without undue delay. The need to move very quickly in some situations was emphasized by several Directors. Recognizing that these constraints will affect different cases differently, Directors agreed on the following policy regarding procedures for early consultation to be followed in all cases involving access above the limits.
Once management decides that new or augmented exceptional access to Fund resources may be appropriate, it will consult with the Board promptly in an informal meeting. Directors will be provided with a concise note that sets out the following as fully as possible: (i) a tentative diagnosis of the problem; (ii) the outlines of the needed policy measures; (iii) the basis for a judgment that exceptional access may be necessary and appropriate, with a preliminary evaluation of the four substantive criteria1 applying in capital account crises, and including a preliminary analysis of external and sovereign debt sustainability; and (iv) the likely timetable for discussions. Staff will circulate this note to Executive Directors at least two hours prior to the informal session, to give Directors some time to absorb the material before meeting. This meeting will provide the basis for consultation with capitals and the issues that emerge would be addressed in a further informal session.
Additional consultations with Executive Directors will normally be expected to occur between the initial informal meeting and the Board’s consideration of the staff report. The briefings will aim to keep the Board abreast of program-financing parameters, including assumed rollover rates, economic developments, progress in negotiations, any substantial changes in understandings, and any changes to the initially envisaged timetable for Board consultation. The staff will provide the Board with a separate report evaluating the case for exceptional access based on further consideration of the four substantive criteria, including debt sustainability. To the extent that program parameters are not yet agreed, this report will clearly be tentative. Where time permits, this report will be provided to the Board in advance of the circulation of program documents. In all cases, this report will be included in the program documents.
Management will consult with the Board specifically before concluding discussions on a program and before any public statement on a proposed level of access.
Strict confidentiality will need to be maintained, and public statements by members, staff and management should take special care not to prejudge the Board’s exercise of its responsibility to take the final decision.
As the Board agreed in September, the staff report for an arrangement proposing exceptional access will include: a consideration of each of the four substantive criteria for exceptional access in capital account crises (including a rigorous analysis of debt sustainability); a thorough discussion of need and the proposed level of access; an assessment of the risks to the Fund arising from the exposure and its effect on liquidity; and systematic and comprehensive information on the member’s capacity to repay the Fund.
Directors highlighted the unusual uncertainty and risk that is often associated with the projections of private capital flows and the difficulty this poses for program design. In such cases, it is especially important to be explicit and cautious about the assumptions underlying the projections for financing and their sensitivity to shocks. A number of Directors requested that further information be provided to the Board discussing private sector involvement in program financing. There will normally be a range of potentially applicable approaches for sustaining private sector financial flows, including voluntary efforts to overcome collective action problems among creditors, that could help meet the objectives of the program. Directors agreed that discussions of these issues would be expected to be part of the Board consultations for exceptional access cases set out above.
Directors also agreed to include in the program documentation a standard table that would gauge proposed access levels against a broader set of metrics, and complement quota based metrics. While Fund access would not be constrained to, or evaluated against, any of the indicators proposed in the paper, these indicators would provide useful additional perspective and help ensure uniformity of treatment among members. Directors agreed that a table along the lines proposed in the staff paper should be included in all requests for exceptional access with the possible inclusion of additional indicators as might be needed.
Directors considered possible changes to the maturity of repurchases under the Supplemental Reserve Facility (SRF), as well as the appropriate mix of Fund resources in capital account crises. They observed that the experience with capital account crises has shown a greater variance in the duration of countries’ balance of payments need than originally expected. Most Directors expressed concern about the increased use of so-called “blends” of credit tranche and SRF resources. The Board has decided to lengthen the maturity of SRF expectations by one year and obligations by six months, and to strengthen the presumption that exceptional access in capital account crises should be provided under the SRF. A number of Directors stressed that there should be a strong presumption to use only SRF resources in all cases where exceptional access is used in capital account crises.
Directors also had an initial exchange of views about the implementation of the Fund’s access policy in situations where a debt restructuring is needed. They stressed that difficult and well-informed assessments will be required to deal with financial challenges and needs that are fundamentally different from those of countries with a sustainable debt burden. In particular, the substantive criteria for exceptional access in capital account crises will generally not be met and the conditions for the use of the SRF will not apply. Directors generally agreed that access in such cases would normally be expected to be within the access limits, although there could be rare circumstances warranting exceptional access. A few Directors were hesitant to allow for any possibility of exceptional access in debt restructuring cases.
Directors agreed that the consistent implementation of the new framework for access policy will be an important contribution to the Fund’s ongoing efforts to heighten the degree of clarity and predictability for both members and markets about the Fund’s response in crisis resolution. They welcomed the proposal for a stock taking on the operation of this framework after one year.
Summing Up by the Acting Chair—Review of Exceptional Access Policy Executive Board Meeting 04/36, April 14, 2004
Directors welcomed the opportunity to take stock of the experience with the new framework for exceptional access to Fund resources. This framework was put in place about one year ago, and has informed the Board’s decisions to provide exceptional access for Argentina and Brazil. Today’s discussion has covered issues relating to the application of the four substantive criteria for exceptional access. In addition, the Board has reviewed the new procedures for early Executive Board involvement in the run-up to formal Board discussions on exceptional access requests and the additional information and documentation that are now required. Directors also discussed the staff’s analysis of the strategies and circumstances that lead to a reduction in high levels of outstanding Fund credit in the countries that have recently benefited from exceptional access. The Board will further discuss issues related to exceptional access in a precautionary setting, including as part of an exit strategy, in the context of the upcoming discussion on precautionary arrangements scheduled for July 2004.
Directors noted that the exceptional access framework has helped to improve the clarity and predictability of the Fund’s response to capital account crises for both members and markets. They underlined that the strengthened decision-making procedures agreed to in February 2003 should continue to apply to all requests for exceptional access. Most Directors felt that the exceptional access criteria remain appropriate and, given the limited experience with the framework, considered that it would be premature to change the exceptional access criteria at this point in time. Stressing that cases of exceptional access should be kept few in number in order to safeguard Fund resources, these Directors were in favor of maintaining the requirement that every request for exceptional access be justified in light of the four substantive criteria. Some Directors highlighted the need to define exceptional access based on a more economically relevant set of metrics rather than in terms of a member’s quota, with a few noting that a size and distribution of quotas that reflect more accurately the relative position of member countries in the world economy might have resulted in fewer exceptional access cases.
Directors noted that the exceptional access criteria were designed for members facing capital account crises. They acknowledged that in rare circumstances a need for exceptional access could arise in situations other than a capital account crisis, and that in those cases a member could not be expected to meet all four criteria. Directors took note of the flexibility to grant access under the exceptional circumstances clause.
Most Directors were not in favor of the staff proposal set out in paragraph 13 of the staff report for dealing with exceptional access arising in situations where the member has a pre-existing high exposure to the Fund and does not face a capital account crisis. They believed that the proposed principles could be seen as a weakening of the policy on exceptional access that could lead to an inappropriate increase in the number of exceptional access cases, with risks to the Fund’s financial position. A number of other Directors, however, thought that the current criteria have not provided sufficient guidance in recent requests for exceptional access, and are unlikely to do so for future requests.
Most Directors expressed preliminary views on the merits of exceptional access in the context of a precautionary arrangement. While many of these Directors were willing to consider the possibility of exceptional access in precautionary arrangements, a few of them felt that precautionary exceptional access would be warranted only in a situation where a member has pre-existing exceptional access exposure, as part of an exit strategy to phase out the use of Fund resources. A number of other Directors, however, did not support use of the concept of “potential need” for exceptional access. They expressed concerns about the provision of Fund financing as “insurance” against potential problems, as this could create problems of moral hazard, diminish the role of conditionality, and lead to market expectation of augmentation of exceptional access.
Most Directors noted the importance of incentives for members to repay the Fund as their balance of payments improves, and reiterated the strong presumption that exceptional access should be provided on SRF terms. A number of these Directors stressed that, as a principle, exceptional access should always be subject to SRF-type charges. However, many Directors noted that the maximum maturity of the SRF obligations may sometimes be too short relative to the duration of the balance of payments need, including, in some cases, where the member has high preexisting use of Fund resources and where portfolio shifts may be longer-lasting. Further, the restrictive circumstance test for the SRF would, unless amended, preclude use of that facility outside of capital account crises and in precautionary settings. Directors agreed to continue discussion of the applicability of the SRF to precautionary settings in July 2004. The Board will have the opportunity to review issues related to charges and maturity of the SRF and other facilities at a date to be determined.
In connection with exit strategies, and based on the experience in earlier cases where the Fund was repaid, Directors observed that a member’s capacity to make repurchases and reduce its large Fund exposure will depend on improvements to both the current account and the capital account of the balance of payments. In this context, Directors recognized that some of the features of the current exceptional access cases, particularly the high debt levels, will require the relevant members to sustain high primary fiscal surpluses into the medium term. Given that the balance of payments difficulties of the countries currently with exceptional access appear to be of a medium-term nature, Directors could not rule out the possibility of continued Fund financing for some of these countries for a period of time.
Directors agreed that the procedures for early Board involvement and for the provision of additional information have worked well in supporting an effective decision-making process. Early informal Board meetings on Argentina and Brazil were helpful in providing the Board with information on the progress of negotiations and alerting staff to Directors’ concerns on key aspects of the program. Directors also welcomed the additional information provided in the context of requests for exceptional access—in particular, the documents evaluating exceptional access based on the four substantive criteria, and the rigorous assessment of the financial risks to the Fund arising from the proposed access, its effect on liquidity, and the member’s capacity to repay the Fund. They considered that the framework would be strengthened by the inclusion, in documents presenting future requests for exceptional access, of more in-depth scenario analyses of the financial impact on the Fund and explicit recognition of costs to borrowers and creditors of members incurring arrears to the Fund. In this context, some Directors called for clarification of the Fund’s lending into arrears policy, particularly with regard to the good-faith criterion. In addition, a few Directors requested that the normal circulation period for staff reports prior to the Board not be shortened unless a rapid decision is essential.
Directors noted that the Fund has provided a very high share of total official financing in recent exceptional access arrangements. While financing from other official sources will continue to be decided on a case-by-case basis, some Directors considered that, as members proceed toward graduating from use of Fund resources, it would be appropriate for financing from other official bilateral and multilateral sources to increase. A view was expressed, however, that the Fund should remain the primary source of official financing.
Directors took note of the circumstances in which Fund resources have addressed an underlying balance of payments need that was related to fiscal imbalances. While Fund resources can only be used to meet a balance of payments need, on occasion purchases have in effect been used as a source of budget financing, particularly where the resources have been made available directly to the government rather than retained by the central bank. Several Directors noted that such use increases financial risks to the Fund, including the risk that the associated repurchases become subject to a budget appropriation process, and some Directors recommended that such arrangements be avoided in the future. Several Directors requested a more detailed assessment in the period ahead of the rationale for, and the risks associated with, the use of Fund financing as a source of budget finance.
Directors agreed that future reviews of the exceptional access policy should be undertaken at the same time as regular reviews of access policy in the credit tranches and under the EFF. The next review is scheduled to take place in late 2004.
The Chairman’s Summing Up—Crisis Prevention and Precautionary Arrangements—Status Report Executive Board Meeting 04/90, September 24, 2004
Executive Directors welcomed the opportunity to discuss the status report on Crisis Prevention and Precautionary Arrangements. The Board has discussed the possible use of precautionary arrangements in capital account crisis prevention on several occasions. Directors reiterated their strong support for the main elements of the Fund’s crisis prevention strategy. This is focused on promoting the early adoption by members of sound policy frameworks as the first line of defense against vulnerability to sudden capital outflows. In addition, the Fund provides assurances to its members of its readiness to provide financial support, including above the normal access limits where warranted, in support of an appropriate policy response should a crisis occur.
Directors continue to support specific elements of the Fund’s toolkit for crisis prevention. They agree that the overall experience with normal access precautionary arrangements has been positive. They support the exceptional access criteria, which are designed to provide clarity to both members and markets on the conditions for Fund financial assistance in the event of a capital account crisis, and to facilitate the rapid provision of such assistance. Also, they concur that the wide range of measures taken to improve the Fund’s surveillance mechanisms has enhanced the capacity to advise members on emerging vulnerabilities at an early stage.
Against this background, Directors continued their debate on the need for, and desirability of, a new policy that would clarify the use of exceptional access under precautionary arrangements. On the one hand, many Directors take the view that existing Fund policies are adequate. Their view is based on the following considerations: first, that Fund membership itself provides sufficient insurance to members; second, that regular precautionary arrangements—that is, within the normal access limits—can, and do, provide support for members’ strong policies; third, that innovations to Fund surveillance and efforts to increase transparency are bearing fruit; and fourth, that a new policy could undermine incentives to undertake reforms or to assess risk fully. Directors holding this view also note that the Fund can augment the resources it provides fairly quickly if the need arises. Furthermore, most Directors noted that exceptional access could be used in precautionary settings as part of an exit strategy for countries with outstanding Fund resources above the normal limits, under the flexibility provided by the exceptional circumstances clause.
Several Directors suggested that the Supplemental Reserve Facility be modified to allow its use in precautionary arrangements. The Board will have the opportunity to come back to this at a later stage in the context of the review of charges and maturities of Fund facilities.
The alternative view, held by many other Directors, remains that there is a gap in the Fund’s toolkit left by the expiration of the Contingent Credit Lines in late 2003. These Directors stress that, even if a country is a Fund member and maintains strong domestic policies under Fund surveillance, a capital account crisis can occur as a result of exogenous factors. A new policy that would provide ex ante assurances of appropriate financial support can help strengthen the Fund’s role in crisis prevention. Such a policy would: first, provide increased assurances of the conditions under which Fund resources would be made available in a crisis; second, provide access to Fund resources more in line with the potential need of a member with capital account vulnerabilities or contagion risk; third, enhance incentives for members to adopt strong policies before capital account pressures emerge; and fourth, help to boost market confidence and hence reduce the probability of a costly crisis. Directors holding this view feel that regular precautionary arrangements—while useful in cases where pressures are likely to emerge in the current account—are not an effective tool of crisis prevention for members that pursue sound policies but still remain exposed to exogenous shocks and contagion. They regret the lack of progress in designing a policy on exceptional access under precautionary arrangements, and urge that this issue remain a high priority on the Fund’s agenda.
Directors have expressed a variety of views on the alternative areas that could be explored to improve country insurance against capital account shocks. Some Directors have stressed that future research should not send a signal that the Fund is turning away from the objective of finding an effective means of assisting member countries in their efforts to prevent capital account crises, while some others have cautioned that the staff’s work program should not be pursued with the aim of finding justifications for use of exceptional access in precautionary arrangements. There are differences of emphasis with respect to the orientation of our future work as proposed in the staff report. Today’s discussion has brought out further ideas that could be explored. The staff will keep Directors informed, in the context of the work program discussion and at other opportunities, of how its work will be advanced, taking account of all the suggestions made.
Trade-Related Balance of Payments Adjustment—Fund Support
Trade Integration Mechanism
1. The Fund is prepared to provide financial assistance to members that are experiencing balance of payment difficulties as a result of trade liberalization measures undertaken by other countries. Such assistance shall be made available: (i) in the upper credit tranches under a Stand-by Arrangement, (ii) under the Extended Fund Facility, or (iii) under the Poverty Reduction and Growth Facility, and shall be subject to the general access limits established from time to time under such policies. Liberalization measures undertaken by other members would normally be limited to measures introduced either (i) under a WTO agreement or (ii) on a nondiscriminatory basis.
2. Financing under this decision may be provided to address the existing or anticipated balance of payments difficulties identified in paragraph 1 either at the time of the approval of an arrangement or completion of a program review under such an arrangement, upon the Fund’s determination that the member is implementing economic adjustment policies that are designed to address the identified balance of payments problems.
3. When making a request for financing under paragraph 2 above, the member may also request that the Fund indicate its willingness to consider providing additional financing if the balance of payments difficulties identified in paragraph 1 above that may arise during the course of the arrangement are larger than anticipated at the time of the approval of the original request under paragraph 2 above. This additional financing, which shall not exceed 10 percent of quota, may be requested by the member and be provided at any time during the period of the arrangement upon a determination by the Fund, in the context of a special review under the arrangement, that: (i) the member’s adjustment program is broadly on track and (ii) the additional financing is justified by unanticipated balance of payments difficulties of the type identified in paragraph 1.
4. Nothing in this decision shall be understood as preventing a member from requesting Fund financial assistance outside this decision to address the balance of payments problems identified in paragraph 1.
5. This decision shall be reviewed no later than December 31, 2007.1
Decision No. 13229-(04/33),
April 2, 2004,
as amended by Decision No. 13814-(06/98),
November 15, 2006
Supplemental Reserve Facility
I. Supplemental Reserve Facility
1. (a) The Fund will be prepared to provide financial assistance in accordance with the terms of this section to a member that is experiencing exceptional balance of payments difficulties due 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, if there is a reasonable expectation that the implementation of strong adjustment policies and adequate financing will result, within a short period of time, in an early correction of such difficulties.
(b) This facility is likely to be utilized in cases where the magnitude of the outflows may create a risk of contagion that could pose a potential threat to the international monetary system.
(c) When approving a request for the use of its resources under this section, the Fund will take into account the financing provided by other creditors. In order to minimize moral hazard, a member using resources under this section will be encouraged to seek to maintain participation of creditors, both official and private, until the pressure on the balance of payments ceases. All options should be considered to ensure appropriate burden sharing.
(d) The Fund may make the use of its resources under this section conditional upon the adoption by the member of measures under Article VI, Section 1 of the Fund’s Articles of Agreement.
2. Financing under this section will be available to members under a stand-by or extended arrangement in addition to resources in the credit tranches or under the extended Fund facility, in cases where (i) a member faces the type of balance of payments difficulties described in paragraph 1 above and (ii) the projected access in the credit tranches or under the extended Fund facility, taking into account outstanding purchases, would otherwise exceed either the annual or cumulative limit. In those cases, unless the member’s medium-term financing needs require access in the credit tranches or under the extended Fund facility beyond the annual or cumulative limit, financing in the credit tranches or under the extended Fund facility will not be provided beyond the annual or cumulative limit, and financing beyond either limit will be provided only under this section.
3. Financing under this section will be determined by the Fund, taking into account the financing needs of the member, its capacity to repay, including in particular the strength of its program, its outstanding use of Fund credit, and its record in using Fund resources in the past and in cooperating with the Fund in surveillance, as well as the Fund’s liquidity.
4. Financing under this section will be committed for a period of up to one year, even if the corresponding arrangement is for a longer period, and will generally be available in two or more purchases. The first purchase will be available at the time of approval of financing under this section, which will normally coincide with the approval of the corresponding arrangement. The subsequent purchases will be available subject to the conditions of the corresponding arrangement.
5. The corresponding arrangement will identify the total amount and phasing of the financing provided under this section.
6. (a) A member making purchases under this section shall repurchase the outstanding amounts of its currency resulting from such purchases within two and a half to three years from the date of each purchase in two equal installments; the first installment shall become due two and a half years and the second installment shall become due three years from the date of each purchase.
(b) The member will be expected to repurchase those amounts six months before they become due, provided that the Fund may, upon request by the member, decide to extend one or more such repurchase expectations by six months. If a member fails to make a repurchase as expected, the Fund may require the member to make the repurchase in question within a specified period not to exceed the repurchase schedule under (a) above.
(c) The Fund shall not approve, and the Managing Director shall not recommend for approval, a request for the use of the general resources of the Fund by a member that is failing to meet a repurchase expectation under (b) above. Provision shall be made in each stand-by and extended arrangement for the suspension of further purchases under the arrangement whenever a member fails to meet a repurchase expectation under (b) above.
7. Purchases under this section and holdings resulting from such purchases shall be excluded for the purposes of the definition of reserve tranche purchase pursuant to Article XXX(c).
8. During the first year from the date of the first purchase financed under this section, the rate of charge under Article V, Section 8(b) on holdings acquired as a result of purchases under this section shall be 300 basis points per annum above the rate of charge referred to in Rule I-6(4) as adjusted for purposes of burden sharing. Such rate shall be increased by 50 basis points at the end of that period and every six months thereafter, until the surcharge reaches 500 basis points, subject to the provisions of paragraph 9.
Pending a decision on the use to be given to the income generated under this section, such income shall not be taken into account when determining the amount of net income in excess of the net income target for purposes of paragraph 3 of Decision No. 11482-(97/42), April 21, 1997.
9. The provisions of Decision No. 8165-(85/189) G/TR, December 30, 1985, except Section IV, shall apply to overdue financial obligations arising under this section, subject to the following provision:
The rate of charge on overdue repurchases shall be determined by the Fund but shall not be less than the maximum rate of charge specified in paragraph 8.
10. Except for the purposes of determining the level of conditionality applied to purchases in the credit tranches, the Fund’s holdings of a member’s currency resulting from purchases under this section shall be considered separate from the Fund’s holdings of the same currency resulting from purchases made under any other policy on the use of the Fund’s general resources.
11. In order to carry out the purposes of this section, the Fund will be prepared to grant a waiver of the limitation of 200 percent of quota in Article V, Section 3(b)(iii), whenever necessary to permit purchases under this section or to permit other purchases that would raise the Fund’s holdings of the purchasing member’s currency above that limitation because of purchases outstanding under this section.
12. This section and its operation will be reviewed no later than January 31, 1999.1
Decision No. 11627-(97/123) SRF,
December 17, 1997,
as amended by Decision Nos. 11866-(99/1) SRF, December 22, 1998,
11895-(99/11) SRF, January 25, 1999,
11942-(99/48) SRF/CCL, April 23, 1999,
11982-(99/61) SRF/CCL, June 8, 1999,
12197-(00/48) SRF/CCL, May 4, 2000,
12340-(00/117) SRF/CCL, November 28, 2000,
12902-(02/120) CCL, December 6, 2002,
12943-(03/15), February 21, 2003, and
November 15, 2006
Compensatory Financing Facility1
Compensatory Financing Facility
Section I. General Provisions
1. The Fund is prepared to extend financial assistance, in accordance with the provisions of this Decision, to members that encounter balance of payments difficulties arising out of (i) temporary export shortfalls or (ii) excess costs of cereal imports.
2. Purchases under this Decision and holdings resulting from such purchases shall be excluded for the purposes of the definition of reserve tranche purchase pursuant to Article XXX(c).
3. Except for the purpose of determining the level of conditionality applied to purchases in the credit tranches, the Fund’s holdings of a member’s currency resulting from purchases under this Decision shall be considered separate from the Fund’s holdings of the same currency resulting from purchases under any other policy on the use of the Fund’s general resources. In cases of concurrent requests for purchases under this Decision and for purchases in the credit tranches, purchases under this Decision shall be deemed to be made first.
4. In order to carry out the purposes of this Decision, the Fund will be prepared to grant a waiver of the limitation of 200 percent of quota in Article V, Section 3(b)(iii), whenever necessary to permit purchases under this Decision or to permit other purchases that would raise the Fund’s holdings of the purchasing member’s currency above that limitation because of purchases outstanding under this Decision.
5. The Fund shall indicate in an appropriate manner which purchases by a member are made pursuant to Section II or Section III of this Decision, as well as the export shortfall component and the cereal import cost component of each purchase under Section III.
6. When a request for a purchase is made by a member under either Section II or Section III of this Decision on account of circumstances that have already been taken into account in calculating the amounts of purchases made or to be made under the other Section, double compensation shall be avoided when calculating the amount of the requested purchase.
7. In providing financing pursuant to this Decision, the Fund, as under other policies of the Fund, shall pay due attention to the member’s capacity to service its financial obligations to the Fund, and, having regard to the outstanding financial obligations of the member to the Fund, may reduce the amount of financing accordingly, notwithstanding any other provision in this Decision.
8. Wherever used in this Decision, the expression “arrangement” will mean an upper credit tranche stand-by arrangement, an extended arrangement, or an arrangement under the Poverty Reduction and Growth Facility (PRGF).
9. Without prejudice to the other limitations on purchases specified by this Decision, the Fund’s holdings of a member’s currency resulting from purchases under this Decision shall not exceed any of the following access limits:
(b) 45 percent of the member’s quota for purchases on account of an excess of cereal import costs under Section III; and
(c) a combined limit of 55 percent of the member’s quota for purchases on account of an export shortfall component under Section II or Section III and an excess cereal costs component under Section III.
Section II. Compensatory Financing of Export Fluctuations
Qualification and Timing of Purchases
10. The Fund is prepared to assist members, particularly primary exporters, encountering balance of payments difficulties produced by temporary export shortfalls and such members may expect that their request for purchases under this Section will be met, subject to the provisions of this Decision, where the Fund is satisfied that the shortfall is of a short-term character and is largely attributable to circumstances beyond the control of the member, and
(a) at the time of the request, the members’ balance of payments position apart from the effects of the export shortfall is satisfactory; or
(b) at the time of the request, the Fund approves an arrangement, or, in the case of an existing arrangement, either completes a review under such an arrangement or determines that the member’s policies are such as would, in the Fund’s view, continue to meet the criteria for the use of the Fund’s resources in the upper credit tranches.
11. With respect to compensation under paragraph 10(a), a member may expect that the full amount of compensatory financing, subject to the provisions of this Decision, shall be made available in one purchase, unless estimated data are used for 9 months or more of the 12-month period referred to in paragraph 15, in which case the amount of compensatory financing shall be made available in two purchases, in accordance with the following provisions:
(a) the first purchase shall not exceed 65 percent of the amount of compensatory financing; and
(b) the second purchase request shall not exceed the difference between the amount of the compensatory financing recalculated at the time of the request for the second purchase and the amount of the first purchase and shall not be approved until actual statistical data becomes available for at least 6 months of the 12-month period used for the purposes of the first purchase; if the policy implementation or external circumstances of the member differ materially from that originally anticipated at the time of the request for the first purchase, the Fund may decide not to approve, or to reduce the amount available under, the second purchase.
12. With respect to compensation under paragraph 10(b), a member may expect that the amount of compensatory financing, subject to the provisions of this Decision, shall be made available in more than one purchase, which shall normally be for equal amounts, unless recalculated pursuant to this paragraph, and that
(a) its request for a first purchase will be met immediately, subject to the provisions of this Decision,
(b) its requests for subsequent purchases will be met, subject to the provisions of this Decision, if, at the time of the request for the purchase,
- – the member continues to have an arrangement, and
- – the Fund decides that the member has met the conditions for the purchase or disbursement under the associated arrangement, including the observance or waiver of any applicable performance criteria or other conditions specified therein; provided that the last purchase shall not take place earlier than six months from the first purchase, and any actual statistical data that has become available for the shortfall year shall be used to recalculate the amount of any subsequent purchases under this paragraph.
13. A purchase under paragraph 11 or the first purchase under paragraph 11(a) or paragraph 12 shall not be approved under this Section later than six months after the end of the 12-month period referred to in paragraph 16, provided that it may be approved up to seven months after the end of such period if the delay beyond six months is the result of circumstances external to the member.
14. If, in the opinion of the Fund, adequate data on receipts from services other than investment income are available, the member requesting a purchase under this Section shall specify whether the receipts shall be included or excluded in the calculation of the shortfall. The choice by the member to include such receipts shall continue to apply for a period of three years.
15. The existence and amount of an export shortfall for the purpose of any purchase under this Section shall be determined with respect to the latest 12-month period preceding the request (or, in the case of paragraph 11(a) or paragraph 12, the first request) for which the Fund has sufficient statistical data, provided that a member may request a purchase in respect of a shortfall year for which not more than 12 months of the data on merchandise exports and on receipts from services are estimated.
16. In order to identify more clearly what are to be regarded as export shortfalls of a short-term character, the Fund, in conjunction with the member concerned, will seek to establish reasonable estimates regarding the medium-term trend of the member’s exports based partly on statistical calculation and partly on appraisal of export prospects. For the purposes of this Section, the shortfall shall be the amount by which the member’s export earnings in the shortfall year are less than the geometric average of the member’s export earnings for the five-year period centered on the shortfall year. In computing the five-year geometric average, the Fund, in conjunction with the member, will use an estimate based on a judgmental forecast for the period of the two post-shortfall years, provided that any amount by which the forecast for the period of the two post-shortfall years would exceed the member’s export earnings for the period of the two pre-shortfall years by more than 20 percent shall not be included in such computation. When the Fund allows a member to purchase under the proviso in paragraph 15, the Fund may use such methods as it considers reasonable for estimating exports during the period for which sufficient statistical data are not available. If, in the opinion of the Fund, adequate statistical data are available for this purpose, the calculations and estimates under this paragraph of earnings from an export item shall, with respect to a purchase on account of an export short-fall under this Section or Section III, be made net of the value of imported intermediate inputs, where such value exceeds 50 percent of the gross earnings from the export item and the exclusion of the value of the export item would increase or reduce by at least 10 percent the amount that could otherwise be purchased on account of the export shortfall.
17. When a member has made a purchase under this Section on the basis of estimated data and the amount of the purchase exceeds the amount that could have been purchased on the basis of actual statistical data, the member will be expected to make a prompt repurchase in respect of the outstanding purchase, in an amount equivalent to the excess. The calculation of such an excess with respect to a purchase shall be made on the basis of the same post-shortfall year projections used for the calculation of the purchase, provided that if the member has made more than one purchase with respect to the same 12-month period, the calculation of any excess with respect to all such purchases will be made on the basis of the post-shortfall year projections used for the latest of such purchases.
18. Provision shall be made in all arrangements for the suspension of further disbursements under the arrangement whenever a member fails to meet a repurchase expectation pursuant to paragraph 17. Furthermore, the Managing Director shall not recommend for approval, and the Fund shall not approve, a request for the use of the Fund’s general resources by a member that is failing to meet such an expectation.
19. If a member requests financing under this Section in relation to a shortfall year that in whole or in part is included in the period of the two post-shortfall years concerning any earlier purchase under this Section, the amount of the requested purchase shall be adjusted so as to take into account any amount by which such earlier purchase differs from the amount that could have been purchased on the basis of the data available at the time of the request.
Section III. Compensatory Financing of Fluctuations in the Cost of Cereal Imports
Qualification and Timing of Purchases
20. The Fund is prepared to extend financial assistance subject to the provisions of this Decision to members that encounter a balance of payments difficulty produced by an excess in the cost of their cereal imports.
21. For a period of three years from the date of a member’s first request for a purchase in respect of cereal imports under this Section, any purchases by the member in respect of its export shortfalls shall be made under this Section instead of under Section II of this Decision. The same provision shall apply if, after the end of the three-year period, the member makes a new purchase in respect of cereal imports under this Section.
22. A member with balance of payments difficulties may expect that its request for a purchase under this Section will be met if the Fund is satisfied that any shortfall in exports and any excess costs of cereal imports that result in a net shortfall in the member’s exports are of a short-term character and are largely attributable to circumstances beyond the control of the member, and
(a) at the time of the request, the member’s balance of payments position, apart from the effects of the net shortfall in the member’s exports, is satisfactory; or
(b) at the time of the request, the Fund approves an arrangement, or, in the case of an existing arrangement, either completes a review under such an arrangement or determines that the member’s policies are such as would, in the Fund’s view, continue to meet the criteria for the use of the Fund’s resources in the upper credit tranches.
23. Paragraphs 11, 12, and 13 shall apply mutatis mutandis to this Section. The applicable 12-month period shall be the period referred to in paragraph 25.
24. (a) Subject to the limits specified in paragraph 9, a member may request a purchase under this Section for an amount equal to the net shortfall in its exports calculated as the sum of its export shortfall and the excess in its cereal import costs.
- (b)(i) For the calculation of the net shortfall in exports, an excess in exports shall be considered a negative shortfall in exports and a shortfall in cereal import costs shall be considered a negative excess in cereal import costs.
- (ii) An export shortfall shall be determined in accordance with Section II.
- (iii) An excess in cereal import costs shall be determined in accordance with paragraphs 25 and 26.
25. The existence and amount of an excess in the cost of cereal imports shall be determined, for the purpose of purchases under this Section, with respect to the latest 12-month period preceding the request for which the Fund has sufficient statistical data, provided that the Fund may allow a member to make a purchase on the basis of estimated data in respect of a 12-month period ending not later than 12 months after the latest month for which the Fund has sufficient statistical data on the member’s cereal import costs. The estimates used for this purpose shall be made in consultation with the member. The calculation of a member’s shortfall or excess in exports and its excess or shortfall in the cost of its cereal imports shall be made for the same 12-month period.
26. In order to identify more clearly what are to be regarded as excess costs of cereal imports of a short-term character, the Fund, in consultation with the member concerned, will seek to establish reasonable estimates regarding the medium-term trend of the member’s cereal import costs. For the purposes of this Section, the excess in a member’s cereal imports for the 12-month period referred to in paragraph 25 shall be the amount by which the member’s cereal imports in that 12-month period are more than the arithmetic average of the member’s cereal imports for the five-year period centered on that 12-month period.
27. The amount of a purchase under this Section, as defined in paragraph 24, may be either on account of an export shortfall or on account of an excess in cereal import costs, or the amount may consist of two components, one on account of an export shortfall and the other on account of an excess in cereal import costs. A member shall allocate the amount of its purchase under this Section between the export shortfall and cereal import components, each as limited by paragraph 9(a) or paragraph 9(b), provided that in no case the combined amount shall exceed the limit in paragraph 9(c).
28. (a) The part of a purchase relating to an export shortfall, subject to the limit in paragraph 9(a), shall not exceed the lesser of the export shortfall defined in paragraph 24(b)(ii) and the net shortfall in exports defined in paragraph 24(a).
(b) The amount of a purchase relating to an excess in cereal import costs, subject to the limit in paragraph 9(b), shall not exceed the lesser of the excess in cereal import costs defined in paragraph 24(b)(iii) and the net shortfall in exports defined in paragraph 24(a).
29. (a) Subject to paragraph 31, when a reduction in the Fund’s holdings of a member’s currency is attributed to a purchase under this Section, the member shall attribute that reduction between the outstanding cereal import component and export shortfall component of the purchase.
(b) When the Fund’s holdings of a member’s currency resulting from a purchase under this Section or Section II are reduced by the member’s repurchase or otherwise, the member’s access to the Fund’s resources under this Section will be restored pro tanto, subject to the limits in paragraph 9.
30. (a) After the expiration of the period referred to in paragraph 21, the total amount of the export shortfall components of a member’s purchases outstanding under this Section shall be counted as having been purchased under Section II.
(b) The provisions of Section II shall continue to apply to the export shortfall component of a purchase under this Section after the expiration of the period referred to in paragraph 21.
31. The provisions of paragraph 17, 18, and 19 shall apply mutatis mutandis to purchases under this Section. The applicable 12-month period shall be the period referred to in paragraph 25.
Section IV. Other Provisions
32. All references in other Fund decisions to the Compensatory and Contingency Financing Facility shall be read as the Compensatory Financing Facility.
33. The Fund will review this Decision not later than June 30, 2003 (SM/02/364, 11/27/02).1
Decision No. 8955-(88/126),
August 23, 1988,
as amended by Decision Nos. 9101-(89/30), March 7, 1989,
9153-(89/59), May 19, 1989,
9391-(90/43), March 22, 1990,
9503-(90/114), July 16, 1990,
9586-(90/161), November 15, 1990,
9587-(90/161), November 15, 1990,
9588-(90/161), November 15, 1990,
9604-(90/170), December 5, 1990,
10071-(92/85), July 2, 1992,
10183-(92/132), November 3, 1992,
10186-(92/132), November 3, 1992,
10398-(93/89), June 23, 1993,
10725-(94/58), June 24, 1994,
11169-(95/122), December 20, 1995,
11170-(95/122), December 20, 1995,
11474-(97/36), April 9, 1997,
11475-(97/36), April 9, 1997,
11646-(98/1), January 5, 1998,
11647-(98/1), January 5, 1998,
11851-(98/127), December 15, 1998,
11852-(98/127), December 15, 1998,
11878-(99/2), January 6, 1999,
12121-(00/4), January 12, 2000,
12122-(00/4), January 12, 2000,
12131-(00/9), January 28, 2000,
12141-(00/16) CFF, February 15, 2000,
12325-(00/111), November 10, 2000,
12901-(02/120), December 6, 2002, and
November 15, 2006
Summing Up by the Chairman—Compensatory Financing Facility—Overcompensation Executive Board Meeting 82/1, January 6, 1982
The Executive Board approves the legal interpretation given by the staff in SM/81/234.
The Executive Board agrees for the time being not to change the legal status of a representation to repurchase any amount of over-compensation under the compensatory financing facility.
The Executive Board agrees to maintain the present and past practice under which an overcompensated member would continue to make prompt repurchases, and emphasizes the importance it attaches to maintaining the high standards of prompt repurchase that have generally characterized past experience.
More specifically, the Executive Board agrees, in the light both of past practice and of the nature of overcompensation, that prompt repurchase in the context of the compensatory financing facility decision would mean that the repurchase would normally be made within a period of 30 days. That understanding should be made clear from the start to members that might be in a position to experience an overcompensation problem in the future.
If the normal period of prompt repurchase referred to in paragraph 4 cannot be respected, a report will be made to the Executive Board within a period of up to two weeks as judged necessary by the management and Treasurer, which report should normally be accompanied by a proposal on how to deal with the question in the most prompt and appropriate manner.
Should experience in the future show an increase in the frequency of cases of overcompensation, or a deterioration in the repurchase behavior attaching to such cases of overcompensation, the Executive Board would review the whole policy issue.
1. It is clear from the record that a representation as to repurchase made by a member pursuant to the present paragraph 7 of the compensatory financing decision does not create a legally binding obligation.
2. Prior to the date of the Second Amendment, the Fund did not have the power to require a purchasing member to accept a repurchase obligation (other than the automatic repurchase obligations of Article V, Section 7), except as a “term” safeguarding the Fund’s interests in cases of purchase involving the granting of a waiver pursuant to Article V, Section 4. Since the date of the Second Amendment, however, the Fund has ample authority to change existing, or to create new, repurchase obligations as it deems appropriate to ensure that the use of its resources is consistent with the purposes of the Fund. Thus, the Fund may, under the provisions of Article V, Section 7(d), decide to require members making purchases under the compensatory financing decision in the future on the basis of estimated data to repurchase promptly, as a matter of legal obligation, the amount of any “overcompensation.”