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IMF 2018-19 Review of Facilities for Low-Income Countries – Reform Proposals Summary

Core Content

The IMF 2018-19 Review of Facilities for Low-Income Countries (LICs) and the Review of the Financing of the Fund's Concessional Assistance and Debt Relief to Low-Income Countries were conducted in May 2019. These reviews aimed to assess the effectiveness of the current framework for concessional lending to LICs, which was established in 2009, and to propose reforms to better meet the evolving needs of these countries.

The review included three main facilities:

• Extended Credit Facility (ECF): For protracted balance of payments (BoP) problems.
• Standby Credit Facility (SCF): For short-term BoP needs.
• Rapid Credit Facility (RCF): For urgent BoP needs, such as natural disasters, fragility, or conflict.

A Policy Support Instrument (PSI) was also part of the framework, used by countries with stable macroeconomic positions to signal policy strength to investors and development partners.

Main Views and Key Reforms

1. Access to Concessional Financing

• A generalized increase of one-third in access limits and norms was proposed to ensure the IMF could provide adequate support while maintaining the self-sustainability of the Poverty Reduction and Growth Trust (PRGT).
• The reforms aim to favor the poorest and most vulnerable LICs by better targeting scarce subsidy resources.
• Blending of concessional and non-concessional financing was recommended for higher-income LICs with access to international financial markets, to ensure that support is directed to the most in need.

2. Support for Fragile and Conflict-Affected States (FCS)

• RCF access limits were to be doubled under the regular window, with a new annual access norm of 25% of quota and a maximum single disbursement limit of 25% of quota.
• This would allow more flexibility in responding to the specific challenges faced by FCS, including natural disasters and conflict-related shocks.

3. Enhancing Flexibility of Facilities

• SCF and ECF instruments were proposed to be modified to increase their flexibility, particularly for countries with near-term objectives.
• The maximum initial duration of ECF arrangements was to be extended from four to five years, provided that a well-sequenced reform plan with strong ownership is in place.
• Automatic termination of SCF arrangements exceeding 24 months was proposed if no program review had been completed within 18 months.

4. Debt Sustainability and Risk Management

• Safeguards were introduced for high access (HA) and exceptional access (EA) cases to enhance the assessment of debt sustainability and repayment capacity.
• A new trigger for HA procedures was proposed, alongside strengthened informational and timing requirements for informal HA and EA engagements.
• The market access criterion for EA under the PRGT was clarified to ensure that only countries with sufficient market access would be eligible for EA.

5. Renaming and Strengthening the PRGS

• The Economic Development Document (EDD) was to be renamed the Poverty Reduction and Growth Strategy (PRGS).
• A PRGS was to be required whenever an SCF or PSI arrangement had an initial duration exceeding two years, with greater flexibility in timing.

6. Rapid Financing Instrument (RFI) Reforms

• The annual and cumulative access limits under the RFI were increased by one-third.
• An additional one-third increase in the cumulative limit for disbursements related to large natural disasters was proposed, expanding emergency support to countries not eligible for concessional financing.

Key Information

• PRGT Self-Sustainability: The reforms were designed to maintain the self-sustaining nature of the PRGT, with income from trust fund investments covering subsidy costs over time.
• Debt Vulnerabilities: Over two-fifths of LICs are now at high risk of or in debt distress, and the review emphasized the need to integrate debt sustainability into program design.
• Natural Disasters: Increased frequency and intensity of such events have raised the demand for emergency financing, prompting reforms to the RCF and RFI.
• Fragility and Conflict: Half of LICs are in FCS, where weak institutions and civil conflict create significant challenges for economic stabilization and reform.
• Catalytic Role: The Fund's programs are seen as playing a key role in supporting economic stability, policy advice, and donor coordination, especially in LICs.

Implementation and Future Outlook

• The next review of the Fund's facilities for LICs is scheduled on the standard five-year cycle, with the possibility of earlier reviews if needed.
• A companion paper analyzed the financial implications of the proposed reforms, emphasizing that the PRGT’s capacity remains intact.
• The review of the PRGT interest rate structure and the review of eligibility for concessional financing are ongoing, with the aim of aligning interest rates and assessing graduation readiness.

Conclusion

The reforms proposed in the 2018-19 review were endorsed by the IMF Executive Board, with the goal of improving the flexibility, responsiveness, and effectiveness of the Fund's support to low-income countries, while ensuring the financial sustainability of the PRGT. The changes reflect the evolving economic landscape and the need to better address the challenges faced by LICs in the context of rising debt vulnerabilities, increased natural disaster risks, and greater integration into the global economy.