International Monetary Fund

Marina Cavallari, Jolanda Koch, Joy Villiger-Wang, Daine Postoak

Bachelor in International Management and Economic

Report submitted as part of the requirements for the BSc in Business

Administration at the School of Business, Lucerne University of Applied Sciences
and Arts.

March 2014
 International Monetary Fund

International Monetary Fund

Marina Cavallari
[email protected]

Jolanda Koch
[email protected]

Daine Postoak
[email protected]

Joy Villiger-Wang
[email protected]

Supervisor: Prof. Dr. Sita Mazumder

[email protected]

Bachelor in International Management and Economics

Report submitted as part of the requirements for the BSc in Business

Administration at the School of Business, Lucerne University of Applied Sciences
and Arts.

March 2014

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 International Monetary Fund

Executive Summary

The International Monetary Fund [IMF] was founded toward the end of World War II in
order to ensure economic cooperation which would avoid a repetition of the disastrous economic
policies that contributed to the Great Depression. The purpose of the IMF is not only to promote
international stability and monetary cooperation but also to facilitate international trade,
promoting high employment and sustainable economic growth, as well as reducing poverty. In
pursuit of its goals, the IMF has three main mandates: First, it monitors the economic policies of its
member states to promote international monetary and financial stability. Second, it offers its
members technical assistance helping to formulate and implement effective economic and
financial policies. Third, it offers financial assistance for its affected members in a crisis situation
and develops reform programs.

The IMF consists of 188 member countries each having one seat in the board of governors.
However, decision making was designed to reflect each country’s position in the global economy
rather than each country having one single vote. The IMF collaborates with other international
institutions such as the World Bank, the World Trade Organization or regional development
banks, each having its own unique responsibilities.

Most of the IMF’s financial resources are provided by its member countries which are
required to pay a maximum amount to the IMF. Other main sources of funding are the IMF’s gold
reserves as well as the loan repayments (interest charges). Furthermore, the IMF may supplement
its own financial resources by borrowing to provide a temporary supplement. For concessional
lending and debt relief for low-income countries, the resources usually come from separate
contribution-based trust funds.

In the past as well as in more recent years, the IMF has faced issues and challenges, leading
to a mobilization on many fronts. The IMF has increased its lending, introduced reforms to
modernize its lending conditionality and is becoming more responsive to member states’ needs.
Reforms improving the current members voting power have been tackled and multilateralism will
be reinforced.

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Table of Contents

PART I: History and Purpos

e
1 History of the IMF.............................................................................................................................................. 5
Cooperation and Reconstruction after Great Depression............................................................5
End of Bretton Woods System.................................................................................................................5
Debt and Reforms......................................................................................................................................... 5
2 Purpose of the IMF............................................................................................................................................ 6
Original Aims.................................................................................................................................................. 6
Adapted IMF................................................................................................................................................... 6

PART II: Key Activities

3 Key Activities of the IMF................................................................................................................................. 7
Surveillance..................................................................................................................................................... 7
Technical Assistance................................................................................................................................... 8
Lending............................................................................................................................................................. 8

PART III: Organisation and Finance

4 Governance and Organisation....................................................................................................................10
Governance Structure.............................................................................................................................. 10
Country Representation.......................................................................................................................... 10
Collaboration with Others...................................................................................................................... 10
5 Finances and Funding................................................................................................................................... 11
Quotas............................................................................................................................................................. 11
Gold Reserves.............................................................................................................................................. 11
Loan Repayments (Interest Charges)................................................................................................11
Borrowing..................................................................................................................................................... 12
Trusts.............................................................................................................................................................. 12

PART IV: Issues and Challenges

6 Recent Issues and Challenges.....................................................................................................................13
Designing Macro-Economic Policy......................................................................................................13
Conditionality and Structural Reform...............................................................................................13
Supporting Low-Income Countries.....................................................................................................13
Organisational Changes........................................................................................................................... 13
Reinforcing Multilateralism...................................................................................................................14

Bibliography......................................................................................................................................................... 14
Appendix A: Lending Instruments...............................................................................................................18

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Appendix B: Loans for Low-Income Countries.......................................................................................19

1 History of the IMF

Cooperation and Reconstruction after Great Depression

During the Great Depression of the 1930s countries tried to save their deteriorating
economic situation by imposing barriers to foreign trade such as competitive currency
devaluations or limiting their citizen’s holdings of foreign currencies (Karabaic and Kingaid, 2012,
p. 1). These self-defeating measures led to a sharp decline in world trade. As a result of this
breakdown in international monetary cooperation, the IMF’s founders formed an institution that
oversaw the international monetary system. The IMF was then founded in 1945 with the task of
overseeing the Bretton Woods agreement conceived one year before. The countries that joined
agreed to peg their exchange rate to the US dollar which in turn was pegged to gold (“Cooperation
and Reconstruction”, 2014).

End of Bretton Woods System

The Bretton Woods system dissolved in the 1970s when rapid US inflation made the gold
standard unsustainable since the Federal Reserve did not have the ability to maintain enough gold
reserves to back the rocketing dollar supply (Karabaic and Kincaid, 2012, p. 1). Since the end of
the Bretton Woods system, IMF members could choose the form of exchange arrangement,
starting the major currencies to float freely against each other (“The end of the Bretton Woods
System”, 2014).

Debt and Reforms

The oil price shocks of the 1970s led the IMF to adapt its lending instruments and
coordinated the global response to the international debt crisis resulting from the oil shocks.
Furthermore, the IMF established the Trust Fund and later a structural adjustment program in
order to respond to the balance of payment difficulties confronting many poor countries (“Debt
and Painful Reforms”, 2014). After the fall of the Berlin wall in 1989 and the reconfiguration of the
Soviet Union in 1991, the IMF had become a universal institution which saw a rapid increase in
memberships. The IMF helped the countries of the Soviet bloc develop from central planning to
market-driven economies. Also, almost every affected country during the East Asian financial
crisis in 1997 asked for both financial assistance and help in reforming their economic policies
(“Societal Change”, 2014). The IMF continued to serve as an organization for research and
international cooperation, as well as a global credit union which tripled its lending capacity in
response to the current crisis that started in 2007 (“Globalisation and the Crisis”, 2014).

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2 Purpose of the IMF

Original Aims
As seen in the previous chapter, the IMF was founded with the intention to ensure
economic cooperation which would avoid a repetition of the catastrophic economic policies that
contributed to the Great Depression. Thus, the purpose of the Bretton Wood system was to
oversee the international monetary system in order to ensure exchange rate stability and
encouraged countries to eliminate exchange rate restrictions. Providing financial stability was in
many ways the main purpose after the foundation and it remains the same today (“What we do”,
2014). Thus the IMF continues to:
 provide a forum for cooperation on international monetary issues
 facilitate international trade growth and thus promote economic growth, job
creation and poverty reduction
 promote exchange rate stability
 lend foreign exchange to help address balance of payments problems

Adapted IMF
Nevertheless, since its creation, the IMF has emerged as a very different organization. The
IMF increased its general lending as well as those to the world’s poorest countries. It provides
greater lending flexibility to better address the individual countries’ needs. Furthermore, the IMF
uses its cross-country experience to analyze and provide advice on policy solutions and the
institution draws lessons from the crisis for policy, regulation and reforms (“What we do”, 2014).

The IMF utilizes three main tools to ensure that member countries are stable financially, so
that the promotion of growth is pursued and the presence of poverty is as well eradicated if
possible (“How we do it,” 2014). Those key activities include surveillance, technical assistance, as
well as lending which will be further described in the subsequent chapter.

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3 Key Activities of the IMF

Surveillance
The IMF promotes economic stability and economic growth amongst countries by
providing surveillance globally, regionally and nationally over economic developments (“How we
do it,” 2014). The IMF’s terminology for surveillance is “…regular monitoring of economies and
associated provision of policy advice is intended to identify weaknesses that are causing or could
lead to financial or economic instability” (“Surveillance”, 2014, ¶ 1).

Global Surveillance. Global surveillance is composed of the reviews by the IMF’s Executive
Board of global economic trends and developments. The Executive Board issues three main
reviews, two of the reviews cover developments, prospects, and policy issues in international
financial markets, which are the World Economic Outlook reports, and the Global Financial
Stability Report. The last report is the Fiscal Monitor, which provides analysis of the latest
developments in public finance (“Surveillance,” 2014) .

Regional Surveillance. The regional surveillance constitutes “…the examination by the IMF
of policies pursued under currency unions—including the euro area, the West African Economic
and Monetary Union, the Central African Economic and Monetary Community, and the Eastern
Caribbean Currency Union” (“Surveillance”, 2014, ¶ 4). Reports are also produced to debate the
economic developments and key policy issues, which are the Regional economic outlook reports.
These reports provide vital data for the Asia Pacific, Europe, Middle East and Central Asia, Sub-
Saharan Africa, and the Western Hemisphere.

National Surveillance. National surveillance is usually conducted more often than global
and regional surveillance, which is regularly an annual activity for the IMF that is composed of
thorough consultations with individual member countries. The consultations are a requirement
for each individual member country and are known as "Article IV consultations" because they
refer to the IMFs Articles of Agreement. As the Article IV consultation undergoes, a team of
economists sent by the IMF, conducts an assessment of economic and financial developments for
each country they visit and discuss the country's economic and financial policies with government
and central bank officials. “The IMF staff missions also often meet with parliamentarians and
representatives of business, labor unions, and civil society” (“Surveillance”, 2014, ¶2).

Spotlight. Post-programme monitoring for Ireland

Apart from its regular surveillance, the IMF also conducts post-programme monitoring. Following
the end of its EU-IMF bailout, Ireland is now subject to a formal post-programme surveillance which
will include two reviews a year until 75 percent of the bailout loans are paid back An analysis as
well as a written report will be prepared after each review, which will then be published and
furnished to euro zone finance ministers (Irish Times, 2014).

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After the IMF team of economists finishes their assessment their results are given to the
IMF management, which has the responsibility of presenting the results to the Executive Board.
The Board then provides each member country’s government with the summary of the Board’s
view. The IMF also provides summaries and discussions on their website and also in press
releases (“Surveillance, 2014).

Technical Assistance
Each member country of the IMF is provided technical assistance and training in a wide
range of areas, such as central banking, monetary and exchange rate policy, tax policy and
administration, and official statistics (“Technical Assistance,” 2014). The beneficiaries of technical
assistance are mostly composed of low- and lower-middle-income countries, in particular in sub
Saharan Africa and Asia. The forms of technical assistance varies, depending on the situation,
which either requires long-term or short-term assistance. The fashion that the IMF delivers
technical assistance also differs for the “IMF staff may visit member countries to advise
government and central bank officials on specific issues, or the IMF may provide resident
specialists on a short- or a long-term basis” (“Technical Assistance”, ¶ 5). In order to meet the
needs of countries that require technical assistance, the IMF fosters relationships with donor
countries that help the IMF establish a better advantage with technical assistance. The notion is to
establish multi-donor trust funds that benefit the IMF’s resources for technical assistance and
enhancing the IMF’s expertise and experience.

Spotlight. Technical assistance for Sudan

The finance minister of Sudan recently asked the IMF to provide the technical assistance and
support to their productive sectors in order to increase efficiency levels, raise exports and increase
the pace of import substitution, as well as to attract more investment to productive sectors and to
boost revenue in non-oil sectors to compensate for the loss in oil revenues as a consequence of
Sudan’s recession in July 2011. Sudan also called on the IMF to provide a program that would help
in its effort to secure debt relief. The IMF made a visit to Sudan early this year to discuss the joint
program for 2014 (Sudan Tribune, 2014).

Lending
Purpose. Lending of the IMF serves three main purposes (“Lending by the IMF” 2014,
¶1517): “First, it can smooth adjustment to various shocks, helping a member country avoid
disruptive economic adjustment or sovereign default, something that would be extremely costly,
both for the country itself and possibly for other countries through economic and financial ripple
effects (known as contagion).

Second, IMF programs can help unlock other financing, acting as a catalyst for other
lenders. This is because the program can serve as a signal that the country has adopted sound
policies, reinforcing policy credibility and increasing investors' confidence.

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Third, IMF lending can help prevent crisis. The experience is clear: capital account crises
typically inflict substantial costs on countries themselves and on other countries through
contagion. The best way to deal with capital account problems is to nip them in the bud before
they develop into a full-blown crisis”.

Conditions. For member countries seeking a loan, the IMF attempts to link conditions to
loan disbursements which are correlated with the country’s strengths in policies and
fundamentals (“Lending by the IMF”, 2014). The parties agree on implementing a set of policies
intending to achieve specific goals in return of a loan. In recent years, more flexibility has been
shown regarding the way the IMF engages with countries on structural reform issues (“IMF
Conditionality”, 2014). Usually over a span of three years instalments of payments of the loan are
disbursed by the IMF and if need be, another loan program will follow, depending on the severity
of the situation. The loan from the IMF usually only covers a small portion of the amount needed
to finance the balance of payments, but signals to outside sources such as investors that the
country is on the right path (“Lending by the IMF”, 2014).

Spotlight. Ukraine Aid Request

Ukraine is currently establishing the need of the IMF’s lending instruments. The country is in need
of a loan very quickly and it has been mentioned that the IMF’s Rapid Financing Instrument would
be a vital loan program. The reason for this loan program is because it “…helps countries with
urgent financial needs and often does not have any explicit conditions attached” (“IMF's Christine
Lagarde,” 2014, ¶ 20). Nevertheless, the IMF must consider the risk which comes with the lending
billions to this country since the Ukraine has a history of not sticking to its reform pledges. Ukraine
is on the brink of causing turmoil for the financial system if nothing is done about the country
reaching default within a few years. Therefore the IMF will play a vital role and may determine the
success of Ukraine’s balance of payments (Economic Times, 2014).

Lending Facilities. The IMF has established numerous lending instruments that have
served many member countries efficiently: the Stand-By Arrangement (SBA), Flexible Credit Line
(FCL), Precautionary and Liquidity Line (PLL), Rapid Financing Instrument (RFI), Extended Fund
Facility and the Trade Integration Mechanism (“Lending by the IMF”, 2014). Explanations on the
different lending facilities can be found in Appendix A.

As for low-income countries that are in need of a loan, the IMF has formed three types of
loans under the new Poverty Reduction and Growth Trust (PRGT) as part of this broader reform:
the Extended Credit Facility, the Rapid Credit Facility and the Standby Credit Facility (“Lending by
the IMF”, 2014). The explanation of these loans can be seen from Appendix B. Many of the low-
income countries have made great progression and no longer are in need of financial assistance
but still require advice and monitoring. Therefore the Policy support Instrument was established,
to help with policy support and signalling (“Lending by the IMF”, 2014).

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4 Governance and Organisation

Governance Structure
Board of Governors. The Board of Governors is the highest decision-making body. It is
composed of one governor for each of the 188 member countries, which is usually the country’s
minister of finance or the central bank’s governor. The board can delegate most of its power to the
Executive Board. Moreover, the Board of Governors meets once a year and are advised by two
ministerial committees, the International Monetary and Financial Committee and the
Development Committee (“Governance Structure”, 2014).

Executive Board. The Executive Board is responsible for conducting the daily business. It
consists of 24 Directors who are appointed by member countries, and one Managing Director who
serves as a Chairman. The Board meets several times each week and carries out its work largely
on the basis of papers prepared by IMF management and staff (The IMF at a Glance”, 2014).

Management Team. The management team of the Fund consists of a Managing Director, a
First Deputy Managing Director and three other Deputy Managing Directors. The main duty of the
team is to oversee the work of the staff and to maintain high-level contacts with member
governments, the media, non-governmental organizations, think tanks, and other institutions.
According to the Fund`s Articles of Agreement, the Managing Director acts as the chief of the
operating staff and conducts the ordinary business of the Fund under the direction of the
Executive Board (“Management”, 2014).

Country Representation
With regard to representation, unlike having one vote for each country, decision making
was designed to reflect each country’s position in the global economy (“Country Representation”,
204). Thus every member is assigned a quota determining its voting power. The concept of quota
will be further discussed in the next section.

Collaboration with Others

The IMF collaborates with other international bodies such as the World Bank, the World
Trade Organization, UN agencies, and regional development banks (“Collaborating with Others”,
2014). Each institution has its own unique duties. For example, while pursuing the same goal of
rising living standards, the IMF focuses on macroeconomic issues and the World Bank
concentrates on long-term economic development and poverty reduction, demonstrating a
complementary approach (“The IMF and the World Bank”, 2014). Moreover, the IMF also
collaborates with the Group of Twenty (G-20) and interacts with think thanks, civil society, and
the media (“Collaborating with Others”, 2014).

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5 Finances and Funding

The IMF relies, principally, on three main sources of funding: (1) requested resources from
its members (Quotas); (2) gold reserves; (3) loan repayments (interest charges) from debtor
countries. Most financial resources of the Fund are provided by its member countries, primarily
through their payment of quotas (“Where the IMF gets its money”, 2014).

Besides the quota subscription, borrowing is another important financial resource of the
Fund. It provides a temporary supplement to quota resources and has played a significant role in
being able to meet members’ needs for financial support during economic crisis. In addition,
separate contribution-based trust funds provide money for concessional lending and debt relief
for low-income countries (“Where the IMF gets its money”, 2014).

Quotas
When a country joins the IMF, it is assigned an initial quota that is calculated based on its
economic size relative to the world economy and its characteristics. The quota subscriptions of
each member countries are assessed by using a quota formula which is a weighted average of GDP,
openness, economic variability, and international reserves. Quotas are denominated in Special
Drawing Rights [SDRs], the IMF’s unit of account.

Quotas play several key roles in the Fund (“IMF Quotas”, 2014):
Subscriptions (quota share). The quota subscription is an indicator of the maximum
amount of financial resources which the country has to provide to the IMF.

Voting power (voting share). As already mentioned in the previous chapter, the quota also
acts as a voting share determining a members voting power. Each member country has basic votes
plus one additional vote for each SDR 100’000 of quota.

Access to financing. Also, the quota has a bearing on the amount of financing a country can
obtain. In general, a member can borrow up to 200 percent of its quota annually and 600 percent
cumulatively. Nevertheless, access might be higher in certain situations.

Gold Reserves
The IMF is the third largest official gold holder with about 2.8 tons of gold (“World official
gold holdings”, 2013). Although the Fund is forbidden to buy gold or engage in other gold
transactions, it may sell gold or may accept gold as payment by member countries. So the IMF may
sell gold to help provide interstitial funding (Sarabia, 2007). In 2008, the institution agreed on
selling a limited portion of gold in order to fund an endowment as part of the IMF’s new income
model. Additionally, profits were used to increase the IMF’s resources for financing concessional
loans to low-income countries (IMF, 2013, p. 56).

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Loan Repayments (Interest Charges)

While the money provided by quotas is normally used to fund loans only, the IMF receives
most of its operational-cost income from the interest charges that are paid by its members who
borrow from the Fund (Sarabia, 2007). In addition to service charges, members borrowing from
the Fund pay interest on loans. These earnings will be typically used to pay the interest to the
country whose quota was tapped in order to provide the loan, while the remaining money goes to
the IMF to support its operating cost (Sarabia, 2007).

Borrowing
The IMF’s quota-funded holdings of currencies, together with its own SDR holdings, make
up its own main financial resources. But if needed, the Fund can supplement these resources by
borrowing. Under specified borrowing arrangements, a number of member countries or their
institutions stand ready to lend additional funds to the IMF, through activation of the
arrangements (“IMF Standing Borrowing Arrangement”, 2014). Borrowing has played an
important role in providing temporary, supplemental resources to the IMF at critical times in the
past. In recent years, the borrowing arrangements with official lenders have been enlarged and
their participation broadened, strengthening IMF liquidity (IMF, 2013, p. 54).

Trusts
Low-income countries receive two primary types of financial assistance: low-interest loans
under the Poverty Reduction and Growth Trust as mentioned in chapter three. As well as debt
relief under various initiatives. The resources for those financial assistance come from member
contribution and the IMF’s own resources, rather than from quota subscriptions (“Where the IMF
gets it money”, 2014). As an example, the 2010 established PCDR Trust for “post-catastrophe debt
relief” was initially financed by the IMF’s own resources but is expected to be replenished by
future donor contributions.

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6 Recent Issues and Challenges

Designing Macro-Economic Policy

The IMF contributes to the design of macroeconomic policy in that it consults its member
countries when lending from the IMF. As mentioned in chapter three, in order to receive a loan
from the IMF, certain conditions need to be followed. Common features involve fiscal austerity,
monetary tightness or exchange rate devaluation, which were originally stated in the Washington
Consensus. However, criticizers have been arguing that those priorities lead to adverse
consequences for economic growth and development (Bird and Rowlands, 2010, p. 138).
However, while accepting that mistakes have been made, the IMF still is of the opinion that
macroeconomic stability is a precondition for sustainable economic growth and development and
thus still defended its approach to its design of macroeconomic policy. According to Bird and
Rowlands, recent developments in macroeconomics have created challenges and uncertainness
for developing macro policies, questioning the IMF’s conventional approach (p. 139).

Conditionality and Structural Reform

The previously mentioned challenge of designing macroeconomic policy spills over into the
design of the IMF’s conditionality in general. The conditions for lending from the IMF included
many aspects of structural reform, which has not been very successful according to some
observers (Bird and Rowlands, 2010, p. 141). For example, although it has been claimed that the
structural adjustment programs of the IMF and the World Bank will reduce poverty in Africa, it is
widely accepted that they have destroyed the country (Jauch, 2012). Nevertheless, this does not
necessarily imply that structural reform is unimportant, but the challenge is to identify
appropriate structural reform and to find the correct amount of conditionality in different sets of
country circumstances. In recent years, the IMF has modernized its conditionality in order to
ensure that they are adequately tailored to the varying strengths of the borrowing countries
(“Tackling current challenges”, 2014). Moreover, Bird and Rowlands state that the recent reform
came also with a softening of the conditionality. Since the conditionally acted as a way of
preventing potential moral hazard associated with its lending, moral hazard may become a more
significant problem which needs to be addressed (p. 145).

Supporting Low-Income Countries

With the global economic and financial crisis of 2008/09 the direct financing role of the
IMF has increased. Thus the IMF has revised its lending instruments, particularly to address more
directly countries’ needs for short-term and emergency support (IMF, 2013, p. 26). New credit
facilities offer emergency support with limited and a more flexible approach to conditionality in

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arrangements with poor country, which guarantees quicker access to loans (Bird and Rowlands,
2010, p. 136). In addition, interest relief will be provided on outstanding loans through the end of
2014 to help low-income countries cope with the crisis (IMF, p. 26).

Organisational Changes
As seen in chapter five each countries quota broadly reflects its position in the economy
and determines its financial commitment, voting rights and access to financing. Criticism of the
IMF’s governance indicates that the under-representation of developing countries and the
overrepresentation of Europe highlights its underlying lack of legitimacy. Nevertheless, according
to Bird and Rowlands, an increase in the effective representation of emerging countries within the
decision-making process of the IMF contains the risk that wealthier countries may disengage and
thus weaken the IMF’s effectiveness and capacity (2010, p. 149). A recent reform in the decision
making framework has been proposed in order to reflect the increasing importance of emerging
markets and developing economies such as China, India, Brazil and Russia. This will shift six
percent of quota shares to emerging markets and thus protect the voice of the poorest countries in
the IMF (“Quotas”, 2014). However, the question is whether this reform goes far enough to
improve the legitimacy and the efficiency of the IMF. Furthermore, Bird and Rowlands argue that
the basic problem is that initially the IMF was intended to be a credit union with members making
subscriptions but also occasionally drawing resources from it. In this case quotas might be
appropriate, but the situation has changed. There is a clear division between countries providing
resources and those drawing resources and thus it might make more sense to design different
formulas for the determination of voting rights, drawing rights and subscriptions (p. 150).

Reinforcing Multilateralism
Problems associated with large global macroeconomic imbalances call for closer
coordination of macroeconomic policy internationally. However, it may be that the IMF is not
appropriately equipped to deal with these issues and it only can draw attention to the dangers the
imbalances carry (Bird and Rowlands, pp. 142-143). The G-20 countries approved to adopt
policies ensuring a lasting recovery and a brighter economic future. At their request, the IMF
provides the technical analysis to evaluate how the member’s policies match with each other and
whether, they can collectively achieve the G-20 goals (“Tackling current challenges”, 2014).
Furthermore, the IMF has launched spill-over reports for the five most systemic economies, China,
the Eurozone, Japan, UK, and the US, to assess the influence of policies by one area on the rest of
the world. Director Christine Lagarde has emphasized that the IMF must continue its efforts to
understanding interconnectedness and incorporating this understanding into its policy analysis
(“Tackling current challenges”, 2014).

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Appendix A: Lending Instruments

Lending Instruments
The Stand-By Arrangement (SBA) has been for emerging market countries. Rates
are non-concessional, although they are almost always lower than what countries
would pay to raise financing from private markets. The SBA was upgraded in 2009
to be more flexible and responsive to member countries’ needs. Borrowing limits
were doubled with more funds available up front, and conditions were streamlined
and simplified. The new framework also enables broader high-access borrowing on
a precautionary basis.
Flexible Credit Line (FCL) is for countries with very strong fundamentals, policies,
and track records of policy implementation. It represents a significant shift in how
the IMF delivers Fund financial assistance, particularly with recent enhancements,
as it has no ongoing (ex post) conditions and no caps on the size of the credit line.
The FCL is a renewable credit line, which at the country’s discretion could be for
either 1-2 years, with a review of eligibility after the first year. There is the
flexibility to either treat the credit line as precautionary or draw on it at any time
after the FCL is approved. Once a country qualifies (according to pre-set criteria),
it can tap all resources available under the credit line at any time, as
disbursements would not be phased and conditioned on particular policies as with
traditional IMF-supported programs. This is justified by the very strong track
records of countries that qualify to the FCL, which give confidence that their
economic policies will remain strong or that corrective measures will be taken in
the face of shocks.
Precautionary and Liquidity Line (PLL) builds on the strengths and broadens the
scope of the Precautionary Credit Line (PCL). The PLL provides financing to meet
actual or potential balance of payments needs of countries with sound policies,
and is intended to serve as insurance and help resolve crises. It combines a
qualification process (similar to that for the FCL) with focused ex-post
conditionality aimed at addressing vulnerabilities identified during qualification. Its
qualification requirements signal the strength of qualifying countries’
fundamentals and policies, thus contributing to consolidation of market confidence
in the country’s policy plans. The PLL is designed to provide liquidity to countries
with sound policies under broad circumstances, including countries affected by
regional or global economic and financial stress.
Rapid Financing Instrument (RFI) provides rapid and low-access financial
assistance to member countries facing an urgent balance of payments need,
without the need for a full-fledged program. It can provide support to meet a broad
range of urgent needs, including those arising from commodity price shocks,

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natural disasters, post-conflict situations and emergencies resulting from fragility.

Extended Fund Facility is used to help countries address balance of payments
difficulties related to structural problems that may take longer to correct than
macroeconomic imbalances. A program supported by an extended arrangement
usually includes measures to improve the way markets and institutions function,
such as tax and financial sector reforms, privatization of public enterprises.
Trade Integration Mechanism allows the IMF to provide loans under one of its
facilities to a developing country whose balance of payments is suffering because
of multilateral trade liberalization, either because its export earnings decline when
it loses preferential access to certain markets or because prices for food imports
go up when agricultural subsidies are eliminated.

Appendix B: Loans for Low-Income Countries

Loans for Low-income Countries

Extended Credit Facility (ECF) provides financial assistance to countries with
protracted balance of payments problems. The ECF succeeds the Poverty
Reduction and Growth Facility (PRGF) as the Fund’s main tool for providing
medium-term support LICs, with higher levels of access, more concessional
financing terms, more flexible program design features, as well as streamlined and
more focused conditionality.
Rapid Credit Facility (RCF) provides rapid financial assistance with limited
conditionality to low-income countries (LICs) facing an urgent balance of payments
need. The RCF streamlines the Fund’s emergency assistance, provides
significantly higher levels of concessionality, can be used flexibly in a wide range
of circumstances, and places greater emphasis on the country’s poverty reduction
and growth objectives.
Standby Credit Facility (SCF) provides financial assistance to low-income countries
(LICs) with short-term balance of payments needs. It provides support under a
wide range of circumstances, allows for high access, carries a low interest rate,
can be used on a precautionary basis, and places emphasis on countries’ poverty
reduction and growth objectives.

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