IMF Approves Reforms Following Credit Line Review

Washington, DC: On October 2, 2023, the Executive Board of the International Monetary Fund (IMF) completed the Review of the Flexible Credit Line (FCL), the Short-Term Liquidity Line(SLL), and the Precautionary and Liquidity Line (PLL). The Board endorsed staff proposals for reforms, with the aim of further strengthening the Global Financial Safety Net (GFSN) and ensuring that the IMF's precautionary facilities toolkit remain fit for purpose as external risks become more prevalent, protracted and diverse.

Usage of the Fund's precautionary instruments has increased since the previous Review of the FCL and PLL in 2017 , and especially since the outbreak of the COVID-19 pandemic. The Review found that precautionary instruments have been effective in providing insurance against external risks, through positive impacts on market sentiments and outcomes, helping countries cushion external shocks during the pandemic, and through favorable costs and terms compared with market financing, particularly during episodes of market stress.

Recognizing that crisis prevention in the current shock-prone environment requires strengthening the qualification framework under the precautionary instruments as well as other reforms of the toolkit, the Review followed a three-pronged approach.

First, to preserve the precautionary instruments' strong signaling power, the Review proposed to reinforce safeguards and ensure a robust qualification framework of the FCL, SLL and PLL. Safeguard reforms include Board briefings after significant economic policy changes and after drawdowns of precautionary FCLs and PLLs, and a Memorandum of Understanding for budget support drawings of FCLs. Certain qualification criteria were clarified and updated, including on Anti-Money Laundering/Combating the Financing of Terrorism and relying on the 2018 Governance Framework to identify governance and corruption vulnerabilities in the context of the qualification assessment.

Second, the Review sought to make IMF precautionary instruments more useful for qualifying members by ensuring the instruments have the flexibility and firepower needed for confronting sizable and persistent systemic risks. Key reforms included:

• raising the SLL and PLL access limits,

• introducing explicit provisions on concurrent use of FCL and SLL to allow members to better respond to a wider variety of shocks, and

• not requiring FCL users to discuss strategies to exit from financing under this instrument when the arrangement involves low-access and is precautionary.

Subject to qualification and demonstration of a potential balance of payments need, these reforms would allow for combined FCL and SLL access of up to 400 percent of quota without the need for a member to articulate exit strategies.

Third and finally, the Review maintained the Fund's sound management of its precautionary toolkit by streamlining administrative procedures related to the use of precautionary instruments. It also assessed risks and potential implications for the Fund from implementing key reforms.

Executive Board Assessment ^[1]

Executive Directors welcomed the review of the Flexible Credit Line (FCL), Short-Term Liquidity Line (SLL), and Precautionary and Liquidity Line (PLL), and the proposals for toolkit reform targeted at ensuring that these instruments remain adequate and fit for purpose. They agreed that crisis prevention is far less costly than crisis resolution, and noted that the review is an important part of the Fund's work to facilitate crisis prevention and strengthen members' access to the global financial safety net. Directors broadly supported the reform proposals as outlined in the staff paper.

Qualification framework

Directors emphasized the importance of preserving the strong signaling power of FCL, SLL and PLL arrangements by ensuring a clear and transparent qualification framework with assessments that are guided by applicable criteria, core indicators, and thresholds, and are applied in an evenhanded manner. To this end, they welcomed that staff reports for approval of arrangements or for completion of reviews will transparently flag, if applicable, any changes in the member's circumstances relevant to qualification-including in values for core indicators-since the most recent assessment in a staff report.

Directors supported the proposal to explicitly integrate the assessment of members' performance in AML/CFT into the effective financial sector supervision criterion, while avoiding cross-conditionality. They welcomed the clarification that, while FATF grey listing will not automatically disqualify a member, a FATF grey-listed country would be unlikely to qualify for the FCL or SLL if staff assesses that deficiencies underpinning the listing indicate that the effective financial sector supervision criterion is not met.

Directors supported relying on the 2018 Governance Framework to identify governance and corruption vulnerabilities as part of the appraisal of the ability to effectively respond to shocks in the context of the assessment of a country's institutional strength. They underscored that the implementation of the proposal should remain consistent with the focus and coverage of governance and corruption issues in Article IV consultations and that, in rare instances where the Article IV consultation has not covered pertinent governance vulnerabilities identified by the 2018 Governance Framework, staff would discuss them with the authorities as part of staff's consideration of qualification.

Directors supported the proposed recalibration of debt sustainability assessments for precautionary PLL arrangements that (i) are subject to the Exceptional Access Policy, or (ii) where shocks that may trigger a drawing are not adequately captured by the medium-term Market Access Country Sovereign Risk and Debt Sustainability Framework modules. However, a few Directors noted the potential risks of this reform and called for careful monitoring and implementation of further safeguards, if necessary. Directors agreed to amend the third setting under which debt sustainability assessments in the context of precautionary arrangements need to be informed by the drawing scenario, in addition to the baseline, to "when there are doubts about the realism of the DSA baseline", so as not to reference internal staff processes.

Adequacy of the FCL, SLL and PLL toolkit

Directors supported the proposed FCL and SLL reform package consisting of (i) lifting the requirement to articulate exit strategies for precautionary FCL arrangements when access under the FCL arrangement, in addition to any outstanding credit under prior FCL arrangements, does not exceed 200 percent of quota, (ii) increasing SLL access limit to 200 percent of quota, and (iii) explicitly allowing for concurrent use of the FCL and SLL. Subject to qualification under each instrument, and assessment of potential balance-of-payments need, these reforms could allow for combined FCL and SLL access of up to 400 percent of quota without the requirement to articulate exit strategies. While broadly supportive of the proposal, a few Directors would have preferred a lower level of combined access, and some emphasized that 400 percent of quota should be seen as neither an entitlement nor a "default" access value. A few Directors were also not convinced about lifting the articulation of exit strategies for FCLs with access up to 200 percent of quota, noting the need for countries to eventually develop adequate self-insurance. Directors agreed that exit should remain state-dependent and a few Directors called for further details when describing exit strategies in staff reports for FCL arrangements with access above 200 percent of quota.

Directors agreed that the PLL continues to have an important role in the lending toolkit and agreed with the proposed increases in access limits. They agreed that both PLL and SLL access limits would be reviewed as part of the next comprehensive review of access limits or if the "review clause" is triggered. In this context, a few Directors underlined that the review of access limits should reflect the outcomes of the 16th General Review of Quotas. Directors also supported staff's proposal to outline procedures for synchronized take-up of the SLL by multiple countries.

Political assurances and safeguard policies

Directors welcomed the proposals to strengthen safeguards around the use of FCL, SLL and PLL arrangements. They noted the applicability of political assurances to these arrangements, and agreed to introduce Board briefings after significant economic policy changes. Directors also supported the proposal of a follow-up briefing on drawdowns of precautionary FCL/PLL arrangements.

Board/administrative procedures and other financial aspects

Directors appreciated the proposals, as described in paragraphs 70-74 of the staff paper, to reduce the number of Board meetings, streamline administrative procedures, and the discussion of qualification in certain Board documents, while stressing that ensuring appropriate Board oversight would continue to be required in all cases. They also concurred with not requiring a full-fledged adverse scenario in standalone SLL staff reports, and that the capacity-to-repay analysis could be streamlined, focusing on short-term liquidity risks.

Directors welcomed the introduction of the SLL into the "review clause" under which a new review of the toolkit would be triggered whenever aggregate outstanding credit and commitments under the FCL and PLL, and SLL instruments reach SDR 150 billion. On a related point, a few Directors called for an interim review before the next regular review of the three instruments. Directors took note of staff analysis of the financial aspects of Fund commitment of financing under precautionary arrangements, including on commitment fees and the scoring of the Forward Commitment Capacity, and agreed to maintain current policies.

Outreach

Directors welcomed the staff's planned outreach to raise awareness of the Fund's precautionary toolkit and communicate the benefits of the available precautionary instruments, including the precautionary Stand-By-Arrangements.