FMI - Adequacy of The Global Financial Safety Net. Considerations For Fund Toolkit Reform (2017)

IMF POLICY PAPER
ADEQUACY OF THE GLOBAL FINANCIAL SAFETY NET—

December 2017 CONSIDERATIONS FOR FUND TOOLKIT REFORM
IMF staff regularly produces papers proposing new IMF policies, exploring options for
reform, or reviewing existing IMF policies and operations. The following documents have
been released and are included in this package:
• A Press Release summarizing the views of the Executive Board as expressed during its
November 9, 2016 consideration of the staff report.
• The Staff Report, prepared by IMF staff and completed on September 30, 2016 for
the Executive Board’s consideration on November 9, 2016.
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International Monetary Fund

Washington, D.C.
© 2017 International Monetary Fund

Press Release No. 17/507 International Monetary Fund
FOR IMMEDIATE RELEASE Washington, D.C. 20431 USA
December 19, 2017
IMF Executive Board Discusses Proposals for Toolkit Reform, Concludes Review of the
Flexible Credit Line and Precautionary and Liquidity Line
The Executive Board of the International Monetary Fund (IMF) has been discussing during
the past year proposals to reform the Fund’s lending toolkit, with the aim of further
strengthening the Global Financial Safety Net (GFSN). In this context, the Board has
considered a proposal for a new liquidity facility, as well as improvements to the Fund’s
existing instruments for crisis prevention as part of the Review of the Flexible Credit Line
(FCL) and Precautionary and Liquidity Line (PLL). The reforms stemming from these
discussions are part of the Fund’s broader agenda to strengthen the GFSN, which also
includes the recent introduction of a new Policy Coordination Instrument and an enhanced
framework for cooperation with Regional Financing Arrangements.
The discussions were informed by three staff papers: “Adequacy of the Global Financial
Safety Net—Considerations for Fund Toolkit Reform” (discussed by the Board on November
9, 2016), “Adequacy of the Global Financial Safety Net—Review of the Flexible Credit Line
and Precautionary and Liquidity Line, and Proposals for Toolkit Reform” (discussed by the
Board on June 30, 2017), and “Adequacy of the Global Financial Safety Net—Review of the
Flexible Credit Line and Precautionary and Liquidity Line, and Proposals for Toolkit
Reform—Revised Proposals” (discussed by the Board on December 6, 2017).
The Review of the FCL and PLL found that the instruments have been effective in providing
precautionary support against external risks, and that successor FCL arrangements and
associated access levels have been appropriately tailored to country circumstances. To
enhance crisis prevention, staff developed a proposal for a new facility, called the Short-term
Liquidity Swap (SLS), to provide members with very strong policies with predictable and
renewable liquidity support against potential, short-term, moderate capital flow volatility.
The SLS was designed as a revolving credit line, and included several other innovative
features. However, the proposal was not adopted by the IMF’s Executive Board. The Review
also covered a possible role for a new Time-Based Commitment Fee (TBCF) in response to
concerns about prolonged use of high-access arrangements on a precautionary basis, but this
proposal was also not adopted. Finally, the Review introduced refinements to the
qualification framework for the FCL and the PLL to make it more transparent and predictable
for actual and potential users.
Executive Board Assessment––November 9, 2016
Executive Directors welcomed the preliminary discussion of potential reform to the

Fund’s toolkit as part of the broader work stream on the adequacy of the global financial
safety net (GFSN). They noted that the recent reforms to the GFSN have helped address the
challenges of a more volatile and interconnected global economy. Since the global financial
crisis, the GFSN has been strengthened considerably and become more multi-layered, with
the overhaul of the Fund’s lending toolkit, the set-up and augmentation of regional financing
arrangements (RFAs), and the establishment of standing bilateral swap arrangements (BSAs)
among reserve-currency issuing central banks.
These positive developments notwithstanding, most Directors shared the assessment

that the current GFSN still provides uneven coverage. Many countries do not have reliable
access to BSAs or RFAs, while very few take advantage of the new Fund instruments
available on a precautionary basis. At the same time, while reserves provide an important line
of defense, some countries may be relying unduly on them for self-insurance. Meanwhile,
coordination among different layers of the GFSN leaves room for improvement. Noting the
Fund’s central role in ensuring a strong, effective GFSN, Directors broadly agreed that the
Fund could help contribute to filling some of these gaps.
To this end, most Directors supported further work on revisiting and enhancing the
Fund’s toolkit for crisis prevention, with a view to improving its predictability and appeal to
users, while continuing to promote sound policies. Many Directors noted that a
comprehensive review of the existing toolkit would have provided useful insight, with some
preferring further analysis of options for the Fund to support countries affected by
commodity price shocks. Directors observed that stigma, which may in part explain the
limited interest in the Fund’s precautionary financing, is a complex issue that deserves deeper
examination. While recognizing the need to address stigma concerns, Directors emphasized
the importance of maintaining incentives for strong policies, minimizing moral hazard,
safeguarding Fund resources, and avoiding overlap and a proliferation of instruments. They
also underscored that strong frameworks and prudent macroeconomic policies are the first
line of defense against crises.
Directors considered the merits of a new liquidity instrument to complement other

layers of the GFSN and possible design features. Most Directors were open to considering
further details, including annual re-qualification, revolving access, and a clause that would
trigger a Board review if aggregate commitments under the instrument exceed a
predetermined threshold. In considering the access limit, a number of Directors urged careful
consideration of the tradeoff between providing effective liquidity support for members and
protecting the Fund’s financial position and credibility. Many Directors remained to be
convinced of the need for introducing a new instrument for liquidity purposes, noting, inter
alia, scope for modifying existing precautionary instruments, the risk of overlap among Fund
facilities, reputational risks, and the potential for repeated use with no exit expectations that
could have a negative impact on the Fund’s liquidity position. A few of these Directors also
pointed to its feature akin to a swap line offered by central banks, which, in their view, risks
departing from the Fund’s traditional role under its mandate.
Directors expressed a range of views on the prequalification feature of a possible

liquidity instrument. Many Directors saw the benefits of applying strong and transparent
criteria to prequalify interested members with strong economic fundamentals and policy
frameworks, which would eliminate the need for ex-post conditionality and, together with an
opt-in option, help reduce stigma. Some Directors considered that qualification standards
should be aligned with those for the Flexible Credit Line. Most Directors noted with some
concern the signaling effects of prequalification and disqualification, which could lead to
another form of stigma. While there may be merits in aligning the periodic prequalification
process with members’ Article IV consultation cycles, Directors emphasized the need to
maintain separation between voluntary prequalification assessments and bilateral surveillance
under Article IV. They urged staff to reflect more carefully on how to operationalize the idea
of prequalification, if pursued, in order to preserve the quality and candor of Fund
surveillance, maintain the Fund’s role as a trusted advisor, and mitigate concerns about the
signaling effects and a rating or tiering of the membership.
Directors highlighted the importance of maintaining coherence within the Fund’s

toolkit. They welcomed the staff’s plan to develop specific modalities for a possible new
liquidity instrument and clarify the role of each instrument in the reformed toolkit in the
context of the forthcoming review of the Flexible Credit Line (FCL) and the Precautionary
and Liquidity Line (PLL), taking into account Directors’ views and concerns. Directors also
called for a deeper assessment of potential demand and implications for the Fund’s resources
and liquidity position. Some Directors suggested that pricing options for insurance-type
instruments also be explored to better rationalize scarce Fund resources. Directors took note
of the staff’s intention to also consider modifying the existing instruments available on a
precautionary basis for the purpose of liquidity provision.
Directors broadly supported further work on a new policy monitoring instrument that
could help countries better coordinate their access to the multiple layers of the GFSN and
signal their commitment to a policy reform agenda. They generally concurred that the
instrument could build on the existing Policy Support Instrument (PSI), with consideration of
features such as: availability to the entire membership, upper credit tranche conditionality, a
more flexible review schedule, and possibly a review-based monitoring of conditionality.
Some Directors felt that further work on this front would benefit from the discussion of the
Fund’s cooperation with RFAs. A few Directors expressed doubts about the potential
demand for this instrument.
In light of today’s discussion, and following additional consultations and outreach,

including to RFAs as necessary, staff will return to the Board in the coming months with two
separate papers. One paper would review the experience with the FCL and PLL, set out a
more refined proposal for a new liquidity instrument, and discuss possible implications for
the existing facilities and Fund resources. The second paper would propose a new policy
monitoring instrument and provide further considerations for the future of the PSI.
Executive Board Assessment—June 30, 2017
Executive Directors welcomed the discussion of the review of the Flexible Credit
Line (FCL) and Precautionary and Liquidity Line (PLL), and proposals for toolkit reform, as
part of the Fund’s broader work stream to strengthen the global financial safety net (GFSN).
They recognized the complementarity of key reform proposals, and appreciated the staff’s
efforts and outreach to build consensus around a reform package. They welcomed the
significant progress that has been made since the Board last discussed the issue in
November 2016.
Directors generally endorsed the main conclusions of the FCL and PLL review. They
broadly concurred that the FCL has provided effective precautionary support against external
tail risks, and that successor arrangements and access levels have been consistent with the
assessment of external risks and potential balance of payments needs. Nevertheless, most
Directors remained concerned about the prolonged use of high-access precautionary
arrangements and thus saw scope for strengthening price-based incentives. Many of them
saw merit in introducing time-based commitment fees, some favored steepening the
commitment fee structure to discourage unnecessarily high precautionary access, and a few
saw scope for a combination of both options. Some other Directors reiterated that exit should
continue to be state-dependent and did not see a case for stronger price-based incentives.
Directors emphasized the need to ensure that staff reports for successor arrangements are
explicit about the expectation of exit and exit strategies.
Directors broadly supported the proposal to use the core indicators and thresholds set
out in Box 3 of the main paper to help guide judgment on FCL qualification by both staff and
the Board. They agreed that this would help improve the transparency and predictability of
the FCL qualification framework, ensuring that the FCL’s high qualification standard is fully
preserved, although a few Directors emphasized the need for flexibility in assessing
qualification against certain benchmarks. Directors also welcomed the staff’s plan to update
the FCL guidance note to strengthen the implementation of the external stress index, with a
few Directors suggesting a broader set of considerations to help inform discussions on access
and exit. A number of Directors saw merit in considering additional reserve drawdown in
adverse scenarios as a way to support lower access levels, while a few others were concerned
about its possible negative consequences.
Directors recognized that the proposal for a new liquidity instrument represents an
important step toward strengthening the GFSN, complementing other layers. Most Directors
supported the creation of a new Short-term Liquidity Swap (SLS) as a special facility to
provide liquidity support for potential balance of payments needs of a short-term, frequent,
and moderate nature, resulting from volatility in international capital markets. Most Directors
considered that the proposed key design elements are broadly reasonable, with some calling
for swift implementation of the new instrument. A number of Directors had reservations
about some key features that, in their view, depart significantly from current Fund principles
and policies, and hence warrant further reflection.
Directors welcomed the proposal to align the SLS qualification criteria and indicators
with those of the FCL to ensure that it is used by members with very strong fundamentals
and policies. While the alignment of qualification would facilitate transition from the FCL to
the SLS (and vice versa) as external risks evolve, Directors stressed that it will be important
that a request for any arrangement follow the respective processes for full qualification and
approval. Directors noted that the proposal to make SLS qualification available year-round,
like the FCL, helps address the concern that prequalification in the context of Article IV
consultation could risk undermining the quality and candor of surveillance.
Regarding the proposed specific features of the SLS, most Directors could support
revolving access capped at 145 percent of quota, with a 12-month repurchase obligation. A
few Directors would prefer higher access for the facility to be more attractive and useful for
member countries facing larger potential liquidity needs. Most Directors also considered the
proposed service charge and non-refundable commitment fee as broadly reasonable, noting
that given the special balance of payments need and revolving nature of the SLS, the overall
pricing is comparable to that applied to other Fund facilities. Some other Directors were not
convinced that the proposed differential fee structure is warranted or provides the right
incentives.
Directors appreciated staff efforts and suggestions to minimize the perceived stigma
of Fund support, which many Directors could support. Nevertheless, there remained concerns
over the possibility of a central bank sole signatory, the absence of exit expectations, and the
extension of an offer or the conditional approval of an SLS arrangement. Some Directors
were also concerned about the negative signaling effect of de-qualification, particularly in the
case of synchronized extension of offers, although others shared the staff’s assessment that
these risks should be manageable.
Directors reiterated the importance of maintaining a streamlined and coherent toolkit.

To this end, they generally supported eliminating the PLL. While some Directors were
concerned that elimination may be premature and would create a new gap in the Fund’s
toolkit, most considered that the benefits outweigh the costs, given the low use of the PLL
and broader concerns about tiering and proliferation of instruments.
Directors welcomed the analysis on the resource implications of the proposals. They
noted the staff’s expectation that the SLS could be accommodated comfortably within the
Fund’s existing quota-based resource envelope. Some Directors pointed to constraints facing
the Fund’s resource envelope and the potential that demand for the new instrument could be
large. In this regard, some felt that staff estimates may be on the low side, considering also a
possibility that potential SLS users could also request higher access under the FCL. A few
Directors expressed concern that encumbering the Fund’s balance sheet with insurance-type
instruments, for a subset of the members that would qualify, could squeeze the resource
envelope available for financing actual balance of payments needs.
Directors broadly supported the proposal to review the SLS after two years, or sooner
if aggregate outstanding credit and commitments under the SLS and FCL exceed
SDR150 billion. Given the innovative nature of the SLS and the potential effects on Fund
resources, many Directors favored a clause establishing a timeframe for the Board to
consider whether to renew or terminate the facility. A few other Directors did not see a need
for such a clause, noting that it would undermine the usefulness of the new facility. On
balance, most Directors were willing to go along with an emerging consensus. Directors
generally supported full scoring of precautionary arrangements in calculating the Fund’s
forward commitment capacity (FCC) to provide clear assurance that committed resources
will be available to the membership in all circumstances. Nevertheless, a few Directors saw
some scope for flexibility in scoring these commitments against the FCC, given the low
probability of drawing under such arrangements.
Directors encouraged staff to revisit outstanding issues and refine the proposals in
light of today’s discussion. They looked forward to a follow-up meeting to consider the
package of reforms. They recognized that the reform proposals discussed today, if adopted,
would require consequential changes to existing Fund policies.
Executive Board Assessment––December 6, 2017
Directors welcomed the opportunity to further discuss the review of the Flexible
Credit Line (FCL) and Precautionary and Liquidity Line (PLL), and proposals for Fund
toolkit reform, as part of the Fund’s work to strengthen the global financial safety net
(GFSN). They also highlighted other recent achievements in this work stream, particularly
the establishment of the non-financing Policy Coordination Instrument (PCI) and the
operational principles and framework for future Fund engagement with regional financing
arrangements (RFAs).
Many Directors regretted that there was insufficient support to establish the Short-
Term Liquidity Swap (SLS) at this juncture, particularly given heightened global uncertainty
and ongoing geopolitical risks. They noted that this type of liquidity facility could be an
important addition to the Fund’s lending toolkit and that several proposed features of the SLS
could serve as a blueprint for further consideration of such a facility in the future. Some
Directors recalled their reservations regarding the SLS proposal. Many Directors encouraged
further consideration of the coherence of the lending toolkit and coverage of the GFSN going
forward.
Directors agreed to complete the scheduled review of the FCL and PLL. A few
Directors expressed preference to eliminate the PLL on the basis of its low usage, perceived
tiering vis-à-vis the FCL, and overlap with precautionary Stand-By Arrangements (SBAs).
Other Directors reiterated concerns that eliminating the PLL could open up a new gap in the
toolkit. On balance, most Directors supported the retention of the PLL.
With the PLL remaining part of the toolkit, Directors supported the proposal to
extend to the PLL the use of the same core indicators and thresholds already adopted as part
of the FCL qualification framework, as set out in Box 1 of the Board paper. They noted that
these indicators and thresholds will help guide assessments on PLL qualification by staff and
the Board without changing the PLL qualification standards. Directors stressed that judgment
should continue to be applied in FCL and PLL qualification assessments. Directors
welcomed the plan to revise the FCL and PLL guidance notes to reflect the new indicators, as
well as to improve the implementation of the external economic stress index and the
assessment of the impact of reserve drawdown on access levels.
Directors discussed the merits of strengthening incentives for a timely exit from
arrangements in the credit tranches that provide members with very high access to Fund
resources over a prolonged period. They broadly concurred that the FCL has provided
effective precautionary support against external tail risks, and that successor arrangements
and access levels have been consistent with the assessment of external risks and potential
balance of payments needs. Some Directors also noted the staff’s finding that there was no
evidence of unjustified prolonged use of the FCL. Directors agreed that exit from
precautionary Fund support should be state-contingent. Nonetheless, most Directors
considered that the proposal of introducing a time-based commitment fee (TBCF) could
strengthen price-based incentives to exit from prolonged use of high-access arrangements on
a precautionary basis. A number of Directors, however, were not in favor of introducing a
TBCF on the basis that it would run counter to the principle that exit from precautionary
Fund support should be state-dependent. A few also expressed concerns that a TBCF could
make requesting Fund arrangements for precautionary purposes less attractive to potential
users. On balance, the proposal to establish a TBCF was not adopted.
Directors agreed that staff reports for successor FCL and PLL arrangements should
continue to provide details on an exit strategy, including a statement on the expectation that
access will normally decline when the right conditions (as set forth in BUFF/10/125) are in
place, underpinned by a sound and transparent analysis of the risks facing the member
country and the authorities’ efforts to increase the country’s resilience, in order to guide
market expectations while ensuring that exit continues to be state-contingent.
In accordance with the Board decision on streamlining policy reviews, the experience
with the use of the FCL and the PLL will be reviewed in five years or more, or on an as-
needed basis, while many Directors expressed a preference for the timing of the next review
to be less open-ended and take place within five years.
ADEQUACY OF THE GLOBAL FINANCIAL SAFETY NET—
September 30, 2016 CONSIDERATIONS FOR FUND TOOLKIT REFORM
EXECUTIVE SUMMARY
Growing demand for liquidity in the face of increased vulnerabilities calls for
enhancing the liquidity support provided through the global financial safety net
(GFSN). The global economy is experiencing a period of protracted uncertainty, marked
by frequent episodes of volatility. Demand for liquidity has intensified, in particular from
emerging markets, which are experiencing a build-up of vulnerabilities and the
depletion of their fiscal buffers. The enhanced GFSN meets only partially this higher
demand for liquidity. The IMFC and G20 have called on the Fund to further strengthen
the safety net.
The uneven use of the Fund’s toolkit for crisis prevention suggests the need to
reconsider its design. Despite a major overhaul of the Fund’s lending instruments
available for precautionary financing, only a modest number of countries have used
them. In particular, the lack of access to a liquidity backstop for members with strong
policies—similar to the standing bilateral swap arrangements (BSAs) among central
banks—limits the availability of Fund support over the whole duration of the shock
during protracted periods of global uncertainty. Moreover, the need to resort to Fund
financing still carries a high political cost (stigma) for some members.
To enhance further the Fund’s toolkit for crisis prevention, consideration could be
given to revisiting the existing toolkit and introducing new instruments.
The toolkit could thus be enhanced by: establishing a new facility for precautionary
financing that would provide a “standing” liquidity backstop to members with strong
fundamentals and policies for use when hit by liquidity shocks; and adjusting the
existing toolkit to maintain cohesion. Any change to the Fund toolkit would need to
take into account the tradeoffs between reducing stigma and containing moral hazard,
while simultaneously safeguarding Fund resources.
A Fund policy monitoring instrument could improve the cohesion of the global
safety net. As the GFSN has expanded and become more multi-layered, there is a need
to improve cooperation across the different layers to unlock financing and signal
commitment to reforms. Creating a policy monitoring instrument that is available to all
Fund members could help in this regard.
Next steps. In light of Directors’ views on these points, staff could come back with
subsequent papers that lay out specific and detailed proposals for reforming the
lending toolkit. While these papers focus on the GRA lending toolkit, a separate
forthcoming paper will assess some aspects of the concessional lending toolkit.
ADEQUACY OF THE GFSN—CONSIDERATIONS FOR FUND TOOLKIT REFORM
Approved By Prepared by an interdepartmental staff team from the Strategy, Policy

Siddharth Tiwari and and Review and Finance Departments in consultation with the Legal
Andrew Tweedie Department, under the overall guidance of Hugh Bredenkamp (SPR)
and Matthew Fisher (FIN). The SPR team was led by
Petya Koeva Brooks and Chad Steinberg and comprised of
Alexander Culiuc, Michael Perks, Preya Sharma; Calixte Ahokpossi,
Ran Bi, Alina Iancu, Nathan Porter, and Christian Saborowski. The FIN
team was led by Donal McGettigan and Ceyda Oner and comprised of
Janne Hukka, Lukas Kohler, Diana Mikhail, Mwanza Nkusu, and
Jean-Guillaume Poulain. LEG contributors included
Katharine Christopherson Puh (lead), Gabriela Rosenberg,
Clifford Blair, Chanda DeLong, Kyung Kwak, Ioana Luca,
Gomiluk Otokwala, and Jonathan Swanepoel.
CONTENTS
I. INTRODUCTION _____________________________________________________________________________ 4
II. GROWING DEMAND FOR LIQUIDITY _______________________________________________________ 5
III. A LARGER GFSN, BUT WITH GAPS _________________________________________________________ 9
IV. THE FUND LENDING TOOLKIT: REFORMS AND GAPS ____________________________________ 11
V. REFORM OPTIONS _________________________________________________________________________ 17

A. A New Liquidity Instrument _________________________________________________________________ 17
B. A New Policy Monitoring Instrument ________________________________________________________ 22
VI. ISSUES FOR DISCUSSION __________________________________________________________________ 29
BOXES
1. A Diagnosis of the Current GFSN______________________________________________________________ 10
2. Recent IMF Toolkit Reforms ___________________________________________________________________ 12
3. Sources of Fund Stigma _______________________________________________________________________ 16
4. Qualification Criteria in the FCL and PLL and in the Prospective New Liquidity Instrument ___ 21
5. Experience with the Policy Support Instrument (PSI) __________________________________________ 26
FIGURES
1. One-year Cross-Currency Basis Swap vis-à-vis the US Dollar ___________________________________ 5
2. Share of AEs and EMs Under Financial Stress __________________________________________________ 6
3. EPFR Net Portfolio Flows During Select Liquidity Events _______________________________________ 7
4. Financial Pressures in Emerging Markets _______________________________________________________ 8
2 INTERNATIONAL MONETARY FUND

5. Eroding Buffers and Increasing Vulnerabilities in Emerging Markets ___________________________ 8

6. "De jure" GRA Toolkit _________________________________________________________________________ 13
7. "De facto" Use of Fund Arrangements 2009–16 _______________________________________________ 14
8. Normal Access Limits vs. Large Net Portfolio Outflows________________________________________ 20
TABLE
1. Current General Resource Account (GRA) Toolkit _____________________________________________ 13
ANNEX
1. Fund Facilities Serving Liquidity Needs for Members with Strong Policies ____________________ 30
INTERNATIONAL MONETARY FUND 3

I. INTRODUCTION
1. The global financial safety net has undergone important reforms since the global
financial crisis, but significant gaps in the architecture remain. The GFSN—comprising
international reserves, central bank bilateral swap arrangements (BSAs), regional financing
arrangements (RFAs), Fund and other IFI resources, and market-based instruments—aims to achieve
three main objectives: (i) provide crisis prevention mechanisms for members; (ii) supply financing
when crises hit; and (iii) incentivize sound macroeconomic policies. The crisis revealed critical gaps in
the GFSN and, while subsequent reforms have contributed towards better meeting these objectives,
there is agreement that more needs to be done.
2. The IMFC and G20 have called on the Fund to explore ways to further strengthen the
GFSN. The recent Board papers in which staff discussed strengthening the international monetary
system (IMS) and assessed the adequacy of the GFSN provided a diagnostic of the current strengths
and weaknesses of the system and proposed areas for reform.1 Additional work has been requested
by the IMFC to revisit the Fund’s lending toolkit to:
• strengthen the Fund’s approach to helping members manage volatility and uncertainty—
including through financial assistance on a precautionary basis; and,
• develop non-financial instruments, such as a policy monitoring instrument covering emerging

market countries (EMs) and advanced economies (AEs).2
3. As part of this work, this paper lays out why enhancing further the Fund toolkit is
central to strengthening the GFSN and what form the enhancements could take. The paper is
organized as follows. It first sets out the growing demand for liquidity support (Section II) in an
environment of elevated uncertainty and more frequent episodes of volatility and assesses the extent
to which the GFSN currently meets this demand (Section III). Section IV reviews the effectiveness of
the Fund—a central part of the GFSN—in responding to these needs. Section V lays out potential
avenues for reform, including the possibility of introducing two new instruments: (i) an enhanced
liquidity backstop and (ii) a policy monitoring instrument. The aim of these reforms would be to
strengthen the availability and predictability of timely safety net resources for many countries,
enhance the ability of the various elements of the GFSN to work together in an effective way, and
lead to better policies at a global level. The final section suggests issues for discussion. Should the
Executive Board see merit in these potential avenues for reform, a more defined and specific set of
proposals could then be developed by staff.
1
See Strengthening the International Monetary System, IMF Policy Paper, February 2016 and Adequacy of the Global
Financial Safety Net, IMF Policy Paper, March 2016.
2
See IMFC Communique, Washington D.C., April 2016 and G20 Leaders Communique September 2016.

II. GROWING DEMAND FOR LIQUIDITY

4. In the wake of the global financial crisis (GFC), both policymakers and markets
demonstrated increased demand for liquidity support. In 2013, six reserve currency-issuing
central banks led the way by putting their existing network of bilateral swap lines onto a standing
basis to “support financial stability by
Figure 1. One-year Cross-Currency Basis Swap vis-à-
reducing uncertainties among market
Average
vis of
the1 US
yr tenors
Dollar (bps)
participants as to whether and when
10
these arrangements would be Covered Interest Parity fails
0
renewed”. Non-reserve currency-
3
-10
issuing central banks have actively Covered
-20
sought opportunities to establish (and Interest
-30 Parity holds
renew/expand) BSAs with central banks
-40
that issue reserve currencies or have
-50
ample reserves. Some Fund members
-60
have privately expressed interest in
-70
access to similar, swap-like support
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
from the Fund. Market participants have
also signaled growing demand for Source: Bloomberg, IMF calculations.
Note: Simple average of the one-year cross-currency basis swaps for
dollar liquidity, despite the large supply
CAD, EUR, GBP, CHF and JPY vis-à-vis the US dollar. Negative values
stemming from U.S. monetary policy. indicate opportunity for arbitrage by holding non-dollar assets.
This is manifested inter alia by the
failure of covered interest parity across major foreign currency markets since the onset of the GFC, as
measured by large FX swap spreads (Figure 1).4
5. The increased demand for liquidity provision is in part a function of the underlying
structural changes that have transformed the global economy. EMs have become more
integrated into the global economy and financial interconnectedness has become much more
pronounced.5 Global financial cycles have increased in amplitude and duration, capital flows have
become more volatile and nonbank finance channels have expanded. While AEs continue to
dominate the global banking system, and financial integration and deepening in EMs has progressed
at a slower pace than trade integration, the size of EMs’ cross-border liabilities has increased
dramatically, intensifying the probability of a foreign-currency liquidity shock.6 Moreover, with a large
share of cross-border activity denominated or settled in U.S. dollars, exposure to risks associated
with global dollar liquidity shortages has risen.
3
See https://www.federalreserve.gov/monetarypolicy/bst_swapfaqs.htm.
4
The change in financial regulations may have also contributed to the failure of covered interest parity. However, the
timing of reforms does not appear to explain all deviations, especially in the immediate aftermath of the GFC.
5
See Strengthening the International Monetary System—A Stocktaking, IMF Policy Paper, March 2016.
6
When there is a need for foreign currency liquidity, which a domestic central bank cannot print, government’s ability
to provide liquidity to markets (through foreign exchange intervention) or directly to market participants (as in an
emergency loan to a bank) is constrained by its access to the GFSN.

6. Conjunctural factors have also played a role in creating a period of heightened and
protracted global uncertainty. Global growth has remained weak and fragile since the GFC, held
back by a combination of persistent interlinked forces—including unfavorable pre-crisis productivity
trends, the legacy of high private and sovereign debt, and hysteresis. Moreover, the disappointing
outlook remains flanked by significant risks, with major transitions set to continue for the foreseeable
future: China’s economic transition, persistently low commodity prices, and a divergence of monetary
policy in the main reserve currency countries. In addition, fiscal buffers have declined in many
countries in the wake of the GFC. As a result, policymakers will likely face an environment of tighter
and more volatile global financial conditions for some time to come.
7. EMs are increasingly at the receiving end of “global” liquidity events. While pre-GFC EM
crises were primarily triggered or enabled by domestic vulnerabilities, since then a growing number
of liquidity shocks have been linked to developments in large AE and EM economies, including the
European debt crisis, the “taper talk” episode and the China market correction (Figure 2).
Consequently, the international community has renewed its focus on the need to provide liquidity
support to members with sound policies.
Figure Share
2. Share of AEs
of AEs and under
and EMs EMs Under Financial
financial stress 1 Stress
100
Russia,
90 Nikkei crash, DBL Tequila GFC
LTCM
bankruptcy, crisis
80 Scandinavian European
Percent of AEs/EMs, FSI
banking crisis debt crisis

70
60 ERM crisis Asian

Argentina, US
crisis
corporate crisis
50
40
Taper
30 talk China
Dot-com
20 crash
Oil
10
0
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
FSI for stressed economies (sum) Advanced economies Emerging markets 2016
Source: IMF calculations.

Note: Financial stress is defined as a period when the financial system of a country is under strain and its ability to
intermediate impaired. When measuring stress, the index primarily relies on price movements relative to past levels or
trends to proxy for the presence of strains in financial markets and on intermediation. The FSI for AEs and EMs has
different components using different methodologies. The sample includes 17 AEs and 27 EMs. The Tequila crisis peak is
biased upward by the smaller set of EMs (only 7) for which pre-1997 data is available.
8. Surprisingly, capital outflows from EMs in recent liquidity events have not been very
large. While pervasive systemic tail risk crises are likely to trigger very large capital outflows,7 this
was not the case in more recent episodes. For example, Figure 3 shows that for a group of 19 large
EMs, net portfolio outflows during the three months following the taper talk totaled around
7
See Adequacy of Fund resources—Preliminary Considerations, March 2016.

US$30 billion, as reported by Emerging Portfolio Fund Research (EPFR), while those associated with
the Chinese market correction and RMB devaluation in the second half of 2015 were around
US$55 billion.8 While EPFR has limited coverage9, BOP data are broadly consistent with these findings
(Figure 83).
Normal acces limits vs. EPRF flows during recent

Figure 3. EPFR Net Portfolio
liquidityFlows During
events Selected
(select EMs)Liquidity Events
10
Taper Talk (May 2013)
China Stock Market Correction (June 2015)
Billion USD
RMB Devaluation (Aug 2015)

5
Poland
Colombia
Kazakhstan
Malaysia
Bulgaria
India
China
Thailand
Chile
Mexico
Russia
Indonesia
Peru
Philippines
Romania
Hungary
Brazil
Turkey
South Africa
Source: EPFR, IMF calculations.
9. These small and generally short-lived but frequent liquidity events can have significant
and persistent financial consequences for members. A new high-frequency indicator that
measures financial pressures in EMs to help identify disorderly market conditions shows that around
80 percent of such conditions since the GFC occurred during global liquidity events, with up to two-
thirds of EMs experiencing high stress during each episode (Figure 4).10 The shocks are also highly
synchronous, as evidenced by the fact that peaks rarely span more than a single week. At the same
time, since the taper talk episode there has rarely been a week not marked by disorderly market
conditions in at least one EM, indicating that overall financial conditions have deteriorated in recent
years.
8
Throughout the text and in figures, the sample of included countries does not provide any indication of potential
qualifiers or users of a liquidity instrument. The broad focus is on advanced economies without a reserve currency, while
the set of large emerging markets is limited by data availability.
9
Generally, EPFR flows represent around one-fifth to one-quarter of BOP-reported portfolio flows.
10
Disorderly Market Conditions are defined as stress situations in financial markets triggered by global and/or
idiosyncratic shocks. The effects are usually amplified by excessively large or rapid FX movements and are
compounded or mitigated by country-specific characteristics, such as macro imbalances, balance sheet FX exposures,
financial market depth and structure, and policy framework.

Figure 4. Financial Pressures in Emerging Markets

Disorderly Market Conditions in Large Emerging Markets
100 GFC
90 High stress
80 Medium stress
European
Percent of Large EMs, VIX level
70 VIX Taper talk

debt crisis
China market
60
Panic of 2007 correction
50 (US housing Russia /
market) oil price
40
Brexit
30
20
10
0
Jan 2006
Jan 2009
Jan 2011
Jan 2012
Jan 2014
Jan 2015
Jan 2007
Jan 2008
Jan 2010
Jan 2013
Jan 2016
Note: Daily data aggregated at weekly level. Sample includes 22 EMs: Argentina, Brazil, Bulgaria, Chile, China, Colombia,
Hungary, India, Indonesia, Kazakhstan, Malaysia, Mexico, Peru, Philippines, Poland, Romania, Russia, South Africa,
Thailand, Turkey, Ukraine, and Venezuela.
10. Although most EMs have managed to emerge from recent liquidity events relatively
unscathed, they may prove more susceptible to future shocks. Stronger fundamentals and policy
buffers generally served EMs well during the GFC and most countries have managed to successfully
navigate the spate of global liquidity events that have followed in recent years. Nevertheless, the
booms and busts in global liquidity and the repeated buffeting have taken a toll. Ample global
liquidity created by highly accommodative monetary policy in AEs contributed to a further build-up
in vulnerabilities—most notably an increase in EM corporate leverage with a concurrent build-up in
currency mismatches11—and depletion of fiscal buffers may have left countries more susceptible to
future capital flow reversals (Figure 5).12
Figure 5. Eroding Buffers and Increasing Vulnerabilities in Emerging Markets

EM Public Debt, percent of GDP Corporate FX Borrowing, percent of GDP EMBI Spreads
65 50 700
2016 Q2
2015
25th/75th percentile Median RUS

60
600
40 TUN EGY
55
500
IDN
50
30 TUR
BRA
400
45 ZAF
MEX PER 300

20 COLMEXTUR
IDN
40 TUN RUS
MAR
HUN MYS MYS
MEX
VEN
VEN 200 PER
CHL ROM HUN
35 ZAFTHA ROM CHN
10 MARPHL
POL IND
ROM
MYS POL
30 TUR 100 PHL
CHL
25 0 0
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 0 10 20 30 40 50 0 100 200 300 400 500 600 700
2011 2013 Q1
11
For a discussion of currency mismatches in EM corporates see, for example, Chui, Kuruc and Turner, 2016, A new
dimension to currency mismatches in the emerging markets: non-financial companies, BIS Working Paper 550.
12
It should be noted that this reduction of public buffers by EMs with sound fundamentals (e.g., sharp increase of
public debt-to-GDP at the 25th percentile) usefully contributed to boosting global demand in the wake of the GFC.

III. A LARGER GFSN, BUT WITH GAPS

11. Partly reflecting the increased demand for liquidity, the GFSN has expanded and
become more multi-layered.13 The network of BSAs among central banks expanded sharply during
the crisis and continues to evolve. At the regional level, new RFAs have been established (e.g., the
European Stability Mechanism (ESM) and the Eurasian Fund for Stabilization and Development
(EFSD)), while existing RFAs have been augmented, including by increasing resources (e.g., the Arab
Monetary Fund (AMF), the Chiang Mai Initiative Multilateralization (CMIM), and the Latin American
Reserve Fund (FLAR)) and establishing new precautionary instruments (e.g., the BRICs Contingent
Reserve Arrangement (CRA), CMIM, and ESM). At the global level, the Fund has enhanced its lending
toolkit, including by establishing new and more flexible instruments that can also be used on a
precautionary basis for crisis prevention—the Flexible Credit Line (FCL) and the Precautionary
Liquidity Line (PLL). Self-insurance, though, continues to dwarf other elements of the GFSN, with the
global stock of foreign exchange reserves growing throughout and after the crisis to around
US$12 trillion by end-2015, well in excess of what would be warranted by the Fund’s ARA metrics.
12. However, the GFSN coverage remains uneven. Outside the small standing network of
BSAs between reserve currency-issuers, BSAs to other AEs and EMs for liquidity support have proven
transitory; most were allowed to expire, and prospects of reestablishment are uncertain.14 Many
countries also either fall outside the scope of, or have limited coverage from, the new and
strengthened RFAs. For members of some RFAs (BRICs CRA, CMIM, and ESM), precautionary support
is often linked to a parallel Fund-supported program and remains largely untested. The use of the
Fund’s reformed lending toolkit has been uneven, with the new instruments available also for
precautionary financing being used by a limited number of countries (see next section). As a result,
some countries remain underserved by the system, with systemic and gatekeeper EMs, importantly,
not having adequate access to predictable and reliable resources for the entire duration of the
potential shock.15
13. Coordination across GFSN layers is underdeveloped. Countries may need to tap several
layers of the GFSN simultaneously, but the coordination mechanisms remain underdeveloped. The
more GFSN elements would be needed, the more challenging it will be to ensure timely provision of
resources and coherent policy advice. Coordination is also largely untested; the Fund has limited
experience working with some RFAs,16 but cooperation with most RFAs remains untested.
13
For the definition, objectives, and a detailed discussion of the evolution and shortcomings of the current GFSN, see
Adequacy of the Global Financial Safety Net, IMF Policy Paper, March 2016.
14
Future reactivation of these BSAs would depend on the domestic policy considerations of the liquidity-providing
central banks, as well as their non-transparent screening of potential users to mitigate credit risks.
15
Gatekeeper countries are economies that belong to multiple trade and financial clusters and can act as transmitters
of shocks between clusters. Systemic countries are economies with significant contributions to the global trade and
financial networks. For a list of gatekeeper and systemic countries see Adequacy of the Global Financial Safety Net,
IMF Policy Paper, March 2016.
16
See Crisis Program Review, IMF Policy Paper, November 2015.

Box 1. A Diagnosis of the Current GFSN

The elements of the safety net can be assessed based on their predictability, speed, reliability,
economic and political costs, and policy content. Will resources be available and accessible, and can their
terms and conditions be anticipated (predictability)? How quickly can resources be activated and disbursed
(speed)? Do resources provide coverage for the entire duration of the shock? That is, are they easy to renew
or extend as needed throughout the shock period (reliability)? What are the financial and political costs
(including stigma) of the resources (costs)? Do policies associated with the various elements provide the
right incentives to prevent a build-up of external imbalances ex-ante and the appropriate correction of
imbalances ex-post (policies)?
Characteristics Reserves Swaps IMF RFAs Hedging
Predictability 2 1 2 1 2
Speed 2 2 1 0 2
Reliability 1 1 1 1 1
Cost 0 (Financial) 2 0 (Stigma) 1 (Stigma) 0 (Financial)
Policies 0 1 2 1 0
Red (0) = Limited/insufficient for predictability, speed, reliability, and policies, and high for cost; Yellow (1) =
Some; Green (2) = Extensive/adequate for predictability, speed, reliability, and policies, and low for cost
Nearly all GFSN elements score poorly against the cost (financial and political) and policies criteria—
highlighting important global inadequacies—and to a lesser extent reliability. Most elements have
significant financial costs (e.g., reserves) or (stigma-related) political costs (e.g., the Fund, and to a lesser
extent RFAs). Strong policy incentives for macroeconomic stability ex-ante and the appropriate correction of
imbalances ex-post could mitigate moral hazard concerns, but only the Fund has an established
macroeconomic policy framework. RFAs’ policy requirements vary widely, and their application can be prone
to political influence. Also, all elements of the GFSN suffer from insufficient reliability for more prolonged
crises, as they provide only limited coverage over protracted periods of global uncertainty.
The current GFSN has serious shortcomings for most groups of borrowers, including systemic and
gatekeeper EMs. When assessing the adequacy and effectiveness of the safety net, the borrower’s
perspective is important. For several relevant country groups, the “best available” combination of the GFSN
elements (e.g., the combination of those elements that are available to that specific group and help them
achieve their objectives) is assessed based on the same five criteria that were used for the assessment of the
GFSN elements. While the safety net serves well the reserve currency-issuing AEs, it has shortcomings for all
other groups of borrowers. Systemic and gatekeeper EMs have inadequate predictability and reliability (from
BSAs) and high financial costs (from reserve accumulation) or political costs (from Fund stigma). From a
global perspective, the GFSN fails to deliver on providing appropriate policy incentives, while insufficient
predictability and reliability of resources lead to overaccumulation of reserves.
Reserve Systemic and

Characteristics Other AEs Other EMs DCs
currency AEs gatekeeper EMs
Predictability 2 1 1 1 2
Speed 2 2 2 1 1
Reliability 2 1 1 0 1
Cost 2 1 0 0 0
Policies 0 1 1 1 1
Source: Adequacy of the Global Financial Safety Net, IMF Policy Paper, March 2016.

14. The current GFSN configuration is also inefficient—both for individual countries and
globally—and does not adequately address moral hazard concerns (Box 1). Individual layers of
the GFSN are subject to significant economic and political costs. Large reserve buffers entail high
opportunity costs for individual countries, while excessive reserve accumulation has important global
negative externalities, and could undermine the resilience of the international monetary system and
reduce global demand.17 At the same time, political costs associated with stigma remain very high for
Fund support, and, to a lesser extent, RFA support. Furthermore, the GFSN fails to provide adequate
incentives for countries to implement sound policies from a global perspective, with only the Fund
having an established macroeconomic policy framework that is regularly and transparently reviewed
and updated. This creates a risk of facility shopping and moral hazard.
15. Reforms can start at home. While fully addressing all these issues would require concerted
efforts across all GFSN layers, the Fund can make an important contribution upfront by focusing on a
few key gaps. The remainder of this paper focuses on these gaps and what might be done to address
them.
IV. THE FUND LENDING TOOLKIT: REFORMS AND GAPS

16. The Fund’s current GRA lending toolkit is designed to provide comprehensive coverage
of member BOP financing needs.18 Since the global financial crisis, the Fund has undertaken a
series of reforms to streamline and address gaps in the lending toolkit. In doing so, the Fund has
shifted its approach away from special facilities that address specific BOP problems, towards a more
flexible framework that could address all types of BOP problems (see Box 2 for more details). As a
result, the current toolkit includes various instruments that cover a wide range of access needs,
including potential BOP needs, and are tailored to the strength of members’ fundamentals and
policies. There is also a range of financing options for actual BOP needs, based on the size,
persistence and nature of the shock/required adjustment, as well as the strength of member policies
(see Table 1).
17. The move towards a more flexible toolkit has both benefits and costs. This breadth of
coverage underpins the high predictability of the Fund’s crisis prevention and resolution support,
with varying access limits and requirements, accessible to the near-universal membership. The shift
away from special facilities towards instruments available for any type of BOP needs has provided
more flexibility and more financing options for members. Nearly all Fund facilities and instruments in
the GRA can theoretically be used to meet actual, prospective or potential BOP needs (see Figure 6).
Nevertheless, this approach also has costs. The overlaps between instruments that can be used for
any type of BOP needs reduce the clarity of the signals sent when a member seeks Fund support.
17
See Obstfeld, M., 2011, The International Monetary System: Living with Asymmetry, NBER Working Paper No. 17641,
December 2011.
18
This policy paper focuses on the GRA toolkit. A separate forthcoming policy paper, “Financing for Development:
Enhancing the Financial Safety Net for Developing Countries—Further Considerations” assesses and clarifies some
aspects of the concessional lending toolkit, including the precautionary toolkit for LICs.

For example, as the key workhorse of the toolkit, the SBA is associated with use by members that
have a need for actual financing and adjustment. As a result, this may have rendered it unattractive
for some members that are looking for a purely precautionary arrangement.
Box 2. Recent IMF Toolkit Reforms

The Fund undertook a major overhaul of its non-concessional lending toolkit in 2009. In the wake of
the global financial crisis, the Fund embarked on a process of reform to streamline and address gaps in the
lending toolkit. A key objective was to ensure a more comprehensive and robust coverage of member needs
within the GRA credit tranches, including a renewed focus on crisis prevention. In particular:
• The Contingent Financing Facility (CFF) and Supplemental Reserve Facility (SRF) were eliminated, in part
due to the rigidity and artificial distinction of BOP needs addressed in these special facilities.
• The FCL was created to meet the demand for crisis-prevention and crisis-mitigation lending for
countries with very strong policy frameworks and track records in economic performance. 1
• The Stand-by Arrangement (SBA) and Extended Fund Facility (EFF) were retained. The SBA maintained
its role as the “workhorse” of the toolkit, with reforms to allow high access arrangements in all BOP
situations, including actual, prospective or potential BOP needs, in either the current or capital account.
The EFF—designed to assist members with protracted BOP needs—was seen at that time as potentially
more useful for LIC members.
Since then, further steps have been taken to refine the lending toolkit. Important refinements and
additions were made in 2010 and 2011 to expand the coverage, enhance predictability and reduce stigma of
Fund financing, particularly on a precautionary basis. Specifically:
• The duration of FCL arrangements was extended in 2010 to allow longer arrangements of two years—
subject to an interim assessment of continued qualification—and the implicit cap of 1000 percent of
quota removed to ensure better consistency with country needs.
• The Precautionary Credit Line (PCL) was introduced in 2010 for countries with sound policies that did
not qualify for the FCL and had no actual (just potential) BOP needs. Like the FCL, approval was based
on qualification criteria, but with streamlined ex-post conditionality focused on addressing remaining
vulnerabilities. The PCL had an instrument-specific cumulative access limit of 1000 percent of quota and
semiannual reviews to assess continued qualification and performance. In 2011, the PCL was replaced
with the more flexible PLL that can be used for actual (as well as potential) BOP needs. A six-month
“liquidity window” was also introduced for countries with actual or potential short-term BOP needs, that
can make credible progress in addressing their vulnerabilities during the six-month period.
• In 2014, the qualification criteria for the FCL and PLL were clarified to enhance the transparency and
predictability of qualification assessments and access decisions.2
• The Rapid Financing Instrument (RFI) was established in 2011 as a single instrument to consolidate and
broaden the scope of the Fund’s emergency assistance, including for urgent BOP needs arising from
exogenous shocks (e.g., natural disasters), post-conflict and other fragile or disruptive situations. The
RFI provides financing in the form of outright purchases, with low access limits, without a Fund-
supported program and subject to only prior actions, where necessary.
_________
1 The FCL aimed to address the gap in the toolkit left by the short-lived Short-term Liquidity Facility (SLF) that was
introduced in October 2008 and had shorter repayment terms and a narrower BOP coverage.
2See Review of Flexible Credit Line, the Precautionary and Liquidity Line, and the Rapid Financing Instrument, IMF
Policy Paper, January 2014.

Table 1. Current General Resource Account (GRA) Toolkit

FACILITY BOP NEED CONDITIONS DURATION ACCESS LIMITS CONDITIONALITY (EX ANTE/
(percent of quota) EX POST) and Reviews
Credit Tranches
Stand-By All actual, Adopt policies to 6–36 month No cap. Exceptional Normally semi-annual reviews;
Arrangement prospective or resolve BOP difficulties arrangement Access criteria apply PCs, SBs, and PAs
(1952) potential; within a reasonable beyond normal access
short- to period
medium-term
Flexible Credit All actual, Very strong ex ante 12/24 month No preset limit No ex post conditionality. Only
Line (2009) prospective or macroeconomic arrangement ex-ante (qualification criteria);
potential fundamentals, economic annual reviews for 2-year FCL
policy framework, and arrangements
policy track record
Rapid Actual, Urgent Outline policy plans and Outright Outright purchase No Fund-supported program;
Financing commitments, and purchases 37.5% of quota; no ex post conditionality or
Instrument cooperate with the Fund 75%of quota reviews but PAs possible
(2011) to solve BOP difficulties cumulative
(may include prior
actions)
Precautionary All actual, Sound policy 6 month 125% per Semi-annual reviews; standard
and Liquidity prospective or frameworks, external arrangement arrangements; 250% continuous PCs, PAs. Ex ante
Line (2011) potential position, and market (Liquidity cumulative (latter due conditionality (qualification
access, including Window) to exogenous shock criteria)
financial sector heightened stress)
soundness 12–24 month 250% - first year upon Ex ante conditionality
arrangement approval; 500% - (qualification criteria)
cumulative Semiannual reviews; ITs and
continuous PCs; Other PCs, SBs
and PAs as warranted.
Special Facilities
Extended Fund Actual or Adopt program, with 12–48 month No cap. Exceptional Normally semi-annual reviews;
Facility potential (in structural agenda and arrangement Access Criteria apply PCs, SBs, and PAs, focusing on
(1974) exceptional annual detailed beyond normal access structural reform
circumstances); statement of policies for
medium-term the next 12 months
Figure 6. “De jure” GRA Toolkit

Balance of Payments Need
Precautionary Actual
Policy strength Duration
FCL FCL SBA EFF

Access / size of shock
PLL PLL
RFI

18. In practice, the Fund’s toolkit has been largely used for financing purposes, with
limited use of precautionary forms of support (see Figure 7). The membership has used the
Fund’s toolkit extensively for actual financing needs. There have been a large number of SBA and EFF
arrangements since 2009, and while demand for the RFI was initially low, the instrument has been
used four times since mid-2014. In contrast, use of the Fund’s FCL and PLL has been more modest.
While there have been 17 FCL arrangements, this has reflected repeated use by only three members,
with the instrument used at high access levels as a backstop against tail risks. Use of the PLL (and its
predecessor the PCL) has been even more limited, with only two countries accounting for a total of
four arrangements––all at mid- to high-access levels. As yet, the 6-month liquidity window has not
been used. In contrast, the SBA has been used on a precautionary basis by 10 members in a total of
14 arrangements, including joint SBA-SCFs, mostly at low- to mid-access levels.
Figure 7. “De facto” Use of Fund Arrangements 2009–16

Balance of Payments Need
Precautionary Actual
Policy strength Duration
FCL SBA EFF

Access / size of shock
PLL
RFI
19. Given the intensified demand for global liquidity, the relatively limited use of the
toolkit on a precautionary basis suggests that it could be enhanced to better meet the needs
of the membership. Few members have made precautionary use of the Fund’s instruments during a
period of intensified demand for liquidity support and at a time when costly self-insurance through
excess reserve accumulation has continued apace. For many, the existing toolkit for crisis prevention
is not considered to be well-suited to meet the current liquidity demands. As set out in the Adequacy
of the GFSN Board paper, the Fund toolkit continues to score relatively poorly in a number of
important areas:
• Reliability––For Fund resources to be reliable sources of financing in periods of stress,

members need to have access to these resources, once qualified, for the whole duration of the
shock. Fund arrangements are reliable; once approved, and with an on-track program,
arrangements can only be terminated by the authorities. However, they are subject to periodic
reviews, and exit expectations in the FCL and PLL may put pressure on users. In the event of a
prolonged period of elevated global risks, Fund support must be extended through successor
arrangements—as seen in the repeated use of the FCL by a small number of members. The

Fund does not currently have an instrument that can provide the type of “standing” support,
with features akin to those of bilateral swap agreements, that some members have expressed a
strong desire for. Importantly, crisis prevention arrangements, as currently designed, do not
provide sufficient flexibility: once an arrangement is drawn upon completely, the resources
available to the member are depleted and are not automatically replenished, not even in the
event of early repurchases.19 In contrast, reserves and BSAs can be used (and re-used) with
high frequency, to manage liquidity pressures during extended periods of volatility.
• Cost—Fund resources are available at a very low financial cost. Nevertheless, they often involve
significant political costs (“stigma”), which delay or prevent members from requesting Fund
support. Efforts to address stigma through the special design features of the FCL and PLL
(especially the use of ex ante conditionality (i.e., qualification criteria) as a full or partial
substitute for traditional ex post conditionality), only benefit a small portion of the
membership. Among the broader membership, there remains a widespread reluctance to use
Fund resources, particularly on a precautionary basis. In addition, tiering within the Fund’s crisis
prevention toolkit may also generate stigma. Limiting some Fund facilities to a subset of
countries singles out those who do not qualify. For example, the somewhat lower qualification
bar has led to the perception that the PLL is a “second-class FCL”,20 while the high-access
precautionary SBA (HAPA) is viewed as inferior to both. This may help explain the modest
number of these arrangements since the creation of the FCL and PLL—a potential risk raised at
the time of the toolkit reforms. Box 3 discusses stigma issues in more detail, setting out the
various sources and ways that they could be addressed, including through the design and fine-
tuning of new and existing instruments, respectively.
• Predictability—while highlighted as a key Fund strength in the Adequacy of the GFSN Board
paper, the transparency and predictability of the FCL and PLL instruments has been limited by a
perception that the qualification decision is subject to considerable judgement. Although the
qualification criteria for the FCL and PLL were sharpened in 2014, it is too early to say whether
the issue has been fully resolved.
20. In Spring 2016, the IMFC called for the Fund to explore ways to help members manage
volatility and uncertainty, including through precautionary financial assistance.21 At the same
time, the international community has called for a stronger IMF role in global liquidity provision,
including through rapid liquidity instruments to deal with capital flow volatility.
21. In responding to these calls, it would be useful to consider adding a policy monitoring
instrument to the Fund’s toolkit that can help to improve coordination across the GFSN layers.
Proposals for such an instrument were last considered at the time of the 2009 reforms. At the time, it
19
Unless there is an augmentation of access during the life of the arrangement.
20
The juxtaposition of “very strong” policies and fundamentals required for FCL qualification and “sound” in the case
of PLL reinforces the perception of tiering of the two instruments. The PLL factsheet also positions the instrument for
“member countries with sound economic fundamentals but with some limited remaining vulnerabilities which
preclude them from using the FCL.” For survey results on facility tiering, see the 2014 FCL/PLL/RFI Review.
21
See IMFC Communique, April 2016 (https://www.imf.org/en/News/Articles/2015/09/28/04/51/cm041616a).

was anticipated that SBAs approved on a precautionary basis could play this role. To some extent
this has happened—with low-access arrangements used for signaling as well as precautionary
purposes. However, the expansion and evolution of the GFSN, particularly the RFAs, has created new
opportunities and demands for a versatile instrument that can facilitate coordination and catalyze
support across GFSN layers.
Box 3. Sources of Fund Stigma

“Stigma” is an all-encompassing term associated with a reluctance of some members to engage the Fund
for policy advice and financing. It can take one or more of the following distinct forms:
• Economic stigma. A request for a Fund program—whether for crisis prevention or crisis mitigation—
can be viewed by markets as a sign of weakness and prompt capital outflow.
• Conditionality stigma. Even when optimally designed, conditionality could create a sense of
intrusiveness and lack of ownership associated with Fund-supported programs.
• Political stigma. While originally rooted in economic and conditionality stigma, the persistently
negative image that the Fund has among opinion leaders, NGOs and the general public in many parts
of the world becomes a distinct, and increasingly important, reason for some policymakers’ reluctance
to approach the Fund.
While any form of financial engagement with the Fund can be viewed as stigmatizing for some members
(“Fund stigma”), certain design features of the lending toolkit have contributed to the stigmatization of
particular instruments.
• Facility tiering. Using qualification criteria to limit the availability of certain Fund facilities to a subset of
countries in effect casts aspersions on the outsiders. For example, due to the somewhat lower
qualification bar, the PLL is viewed as a “second-class FCL”, and the HAPA is viewed as inferior to both.
The use of qualification criteria also has benefits, however, in addressing conditionality stigma—hence
there is a trade-off in toolkit design. Repositioning some instruments in the toolkit according to their
different purposes could improve this trade-off by de-emphasizing the tiering aspect.
• Exit stigma. Exit from an arrangement approved on a precautionary basis due to qualification criteria
no longer being met poses risks of negative market reaction. These risks can discourage countries from
requesting such an arrangement in the first place.
Addressing Fund stigma involves a trade-off between global coverage and country-level effectiveness.
Excessive stigma hampers the Fund’s ability to promote good policies on a wider scale, as it pushes
authorities to exhaust other options before turning to the Fund, ultimately risking deeper and more
protracted crises, with potential spillovers to other countries. However, conditionality—a main driver of
stigma—is instrumental to promoting good policies and necessary adjustment once a member turns to the
Fund. A certain level of stigma is thus unavoidable.
Despite this inherent tradeoff, there may be opportunities to improve the balance, i.e., reducing stigma
through instrument design without reducing the effectiveness of Fund-supported programs. This could
include: (i) offering financial instruments that are clearly for precautionary purposes only (users have no
need for adjustment financing); (ii) wider use of prequalification for such instruments, based on sound
policies, to solidify the perception that a Fund program for crisis prevention is a signal of strength and
(together with other safeguards) avoid the need for ex post conditionality, and (iii) making policy-
monitoring support (i.e. without financing) more widely available to the membership, based on periodic
reviews rather than “hard” conditionality. These ideas are discussed in more detail in Section 6.

V. REFORM OPTIONS
22. A number of measures could be considered to further enhance the Fund’s liquidity and
policy monitoring support. As discussed above, the Fund’s lending toolkit was revamped in recent
years with new instruments that allow for quicker access to liquidity with streamlined ex-post
conditionality. The Policy Support Instrument (PSI), introduced in 2005, is an instrument designed
specifically for policy monitoring. However, the qualification criteria for these facilities restrict their
benefits to limited segments of the membership, while their design could potentially be further
calibrated to better suit members’ needs. Possible reform options include revisiting the existing
toolkit and introducing new instruments, each of which entails different costs and benefits. Specific
reform ideas are discussed further below.
A. A New Liquidity Instrument
Past Fund Experience
23. The idea of the Fund helping members with strong policies to protect against liquidity
shocks is not new. It dates back to at least 1972 when the Economic Counselor at the time,
Jacques Polak, prepared a note on “possible Fund financing of short-term capital movements”. Other
proposals followed in the wake of the capital account crises in the 1990s (see Annex 1). However,
initial proposals for such Fund facilities either failed to be adopted (e.g. the STFF in 1994) or did not
garner much interest among members once established (the CCL and SLF).
24. The experience with the CCL and the SLF suggests that Fund support needs to be
sufficiently predictable and reliable to be attractive. Facilities that are perceived to have excessive
safeguards are unlikely to generate interest among the membership as they tend to be insufficiently
predictable (e.g., need for an “activation review;” lack of clarity on how eligibility criteria would be
applied) and reliable (e.g., a temporary backstop may not last the full duration of the shock).
Importantly, excessive safeguards also worsen stigma. Finally, the experience with the CCL illustrates
how new modalities for Fund support need to be timely: demand for a liquidity backstop against
financial contagion was widespread during the Asian financial crisis but appetite waned as conditions
normalized.
25. While the design of the FCL and PLL took these lessons into account, demand remains
modest, as highlighted in the most recent FCL/PLL/RFI review.22 In particular, remaining stigma
associated with the need to approach the Fund—and perhaps not be granted access under the
identified instrument—remains a concern. In the case of the PLL, these issues may have been further
compounded by the use of ex-post conditionality and the related sense of tiering relative to the FCL.
The 6-month PLL attenuated stigma associated with ex-post conditionality, but usability was affected
by the limitations on the repeat use of the instrument.
22
IMF (2014) “Review of the Flexible Credit Line, The Precautionary and Liquidity Line, and The Rapid Financing
Instrument”.

Reform Options
26. A number of alternatives could enhance Fund liquidity support in ways that improve
reliability and minimize stigma. The ideas below are not all new and each have benefits and costs.
• Revisiting the existing toolkit for crisis prevention. Reforms to the toolkit would need to be
weighed carefully to ensure that they do not weaken the Fund’s ability to facilitate any needed
adjustment in members’ economies or weaken the Fund’s safeguards for the temporary use of
GRA resources, a key requirement under the Articles. Piecemeal changes to existing instruments
may also fall short of addressing the perceived stigma concerns to the extent that these have
already been “tagged” by their experience so far. Against this backdrop, consideration could be
given to: (i) revisiting the qualification criteria and duration terms of existing instruments so that
more members could avail themselves on a precautionary basis without concerns over whether
their duration sufficiently covers the period of anticipated volatility. In addition, to reduce stigma
associated with a member having to resort to Fund support through a “request” for an
arrangement, the idea of allowing a member to opt in to an arrangement rather than requesting
one could be explored; (ii) options to introduce revolving access features to the FCL and PLL
could also be explored—allowing members to reconstitute access as repurchases are made after
drawings. Revisiting existing instruments, as opposed to introducing new ones, has the benefit of
avoiding a proliferation of instruments.
• Use of SDRs for liquidity provision. Pooling and on-lending SDRs could be considered, for
example, by creating a separate funding department for liquidity support, carving out General
Resources on the Fund’s balance sheet for traditional lending for balance of payments needs.
This would require a change to the Articles of Agreement. Whether the SDR could play a broader
role in the IMS will be addressed in the forthcoming Board paper.
• Designing a new instrument. A new liquidity facility could encompass the above reform options,
while potentially being more effective in dealing with stigma by wiping the slate clean and
defining a fresh purpose for the instrument. Such a new instrument could be designed with the
additional aim of better promoting and creating incentives for implementing and maintaining
good policies, addressing the biggest gap in the GFSN identified in IMF (2016). To avoid a
proliferation of instruments in the toolkit, consideration could be given to revisiting the need for
existing ones in the context of the forthcoming review of the toolkit for crisis prevention.
Design Features of a New Instrument
27. A new liquidity instrument would need to improve reliability and reduce stigma. This
could be achieved by introducing a number of innovative design features—moving closer to
“standing” liquidity support, providing credit which is “revolving”, and making support available on
the basis of streamlined prequalification and no ex post conditionality for members with strong
economic policies and fundamentals. A number of safeguards—outlined below—could also be
introduced in the design of the instrument to minimize both moral hazard and risks to Fund
resources (credit and liquidity risks). While the design of the new instrument would make it accessible

to a wider segment of the membership than the FCL, and more appealing than the PLL, the SBA
would remain the Fund’s workhorse instrument, both for members that do not meet the ex-ante
qualification criteria for other instruments and for those facing actual balance of payments needs.
28. Establishing a renewable, reliable backstop, similar to the standing BSA network
established amongst six of the major reserve currency-issuing central banks would enhance
the Fund’s toolkit. The backstop would be aimed at providing support for use in the event of
liquidity shocks of the relatively moderate and frequent variety. There would be no exit expectations
and less stigma than with other instruments for crisis prevention that are de facto being used as
backstops for the occurrence of tail events. It would also reduce incentives for accumulating excessive
precautionary reserves and hence improve global resource allocation.
29. The new instrument would need to be designed to meet the requirements in the
Articles of Agreement. Article V section 3(a) stipulates that the Fund establish adequate safeguards
for the temporary use of the general resources of the Fund to help members resolve their balance of
payments problems. Consideration could be given to potential design features to underpin the
temporary use of Fund resources that might include:
• Early repurchase expectations that would encourage members to use the instrument only for
temporary (typically self-correcting) BOP needs. Setting a relatively short term for repayment,
e.g., one year, would help to manage Fund liquidity risks and help preserve the revolving nature
of Fund resources.
• Annual re-qualification––i.e., based on an assessment at the time of the Article IV

consultations––that would mitigate moral hazard and incentivize members to follow sound
policies. If a member did not implement appropriate policies, its qualification for the instrument
would lapse at the next annual assessment.
• Limited access, such that the backstop only covers liquidity needs likely to arise under relatively
small-scale, short-term volatility. This would limit the aggregate call on Fund resources (see
below) as well as minimizing credit risk. For example, one option would be to cap access under
the instrument at 145 percent of quota––the current normal annual access limit.
30. Consideration could also be given to the introduction of revolving credit—similar to

central bank swap arrangements. Such a move would enable repeated purchases and repurchases
under a single arrangement and across arrangements and move the Fund away from granting access
under arrangements in terms of flows to one in terms of stocks. Within the prescribed access limit, a
revolving-type feature would make the instrument more useful in addressing repeated short-term
liquidity shocks, while limiting the impact on Fund resources and credit risk. The possibility of
reconstituted access rights within the duration of an arrangement would improve reliability of access
and make efficient use of Fund resources.
31. Prequalification and opt-in by qualifying members could also be considered. This might
help improve predictability as to which countries would qualify and, importantly, eliminate the
stigma associated with the need to approach the Fund and “request” a Fund arrangement.

Qualification criteria could be based on well-established analytical frameworks and perhaps be more
parsimonious than for the FCL and PLL (see Box 4). Members could be prequalified periodically
(e.g., in conjunction with the Article IV consultations), further limiting the stigma associated with
requesting a Fund arrangement. Qualification criteria, however, would need to continue to be
calibrated to ensure that qualifying members have strong economic policies and fundamentals, and
an established track record of implementing appropriate policies. This would provide confidence that
qualifying members would undertake adjustment if and when needed and seek to confine the use of
the instrument to addressing possible short-term liquidity shocks.
32. If such a new liquidity instrument is established, further refinements to the existing
financing toolkit may be desirable to maintain the overall coherence of the toolkit. Clarifying
the role of each instrument in the reformed toolkit would be an important task to be undertaken as
part of the upcoming review of the FCL and PLL. With a liquidity backstop aimed at providing
support against small- to medium-sized liquidity shocks, staff would envisage the FCL as the
exceptional-access counterpart, for use as a temporary backstop against extreme shocks/tail events,
with an exit expectation. Since there would likely be a significant overlap between eligibility for the
new liquidity backstop and the PLL—and given the lack of take-up and the issues of tiering vis-à-vis
the FCL—the forthcoming review could consider whether or not to retain the PLL.
FigureLarge
8. Normal Access
Portfolio Limits
Outflows vs. Large
vs. IMF NormalNet Portfolio
Access Outflows
Limit and BSAs
60
50
Billion USD
40
30
20
10
0
Kazakhstan
Poland
Colombia
Singapore
Australia
Iceland
Israel
Malaysia
Guatemala
Bulgaria
Thailand
Norway
India
China
Denmark
Mexico
Russia
Czech Rep.
Chile
Peru
Uruguay
New Zealand
Bolivia
Indonesia
Romania
Korea
Hungary
South Africa
Turkey
Philippines
Brazil
Largest 3-mo portfolio outflows 5th percentile 3-mo portfolio outflows

Normal Annual Access Limit Reserve Currency BSAs
Source: BOP Statistics, IMF calculations.

Note: Bars represent peak quarterly outflows in the period from 2006 to 2016.

Box 4. Qualification Criteria in the FCL and PLL and in the

Prospective New Liquidity Instrument
The choice of qualification criteria for the new instrument would aim to ensure that qualification is predictable
and transparent while ensuring strong fundamentals and policies and safeguarding Fund resources. While both
FCL and PLL introduced ex-ante qualification as a meaningful step towards increasing predictability, they have
only had limited use so far. The new instrument would retain pre-qualification as a key feature but envisage a
more parsimonious set of criteria which, nevertheless, provide adequate assurances that members would take
the appropriate policy measures when faced by a shock.
The FCL/PLL qualification framework aims to promote predictable and evenhanded qualification. Its
core is an assessment that the member’s policies, fundamentals and institutional policy frameworks are very
strong (‘generally sound’ in the case of the PLL). The assessment is meant to give markets and the Fund
confidence that the member would take appropriate policy actions when facing a shock.
Qualification for the FCL is based on nine qualification criteria, grouped into five areas in the case of
the PLL. For the FCL, significant shortcomings on one of the criteria could preclude qualification while the
PLL requires strong performance in most of the five areas; substantial underperformance in any area signals
that the member does not qualify. A member would not be qualified if any of the following applies: (i)
sustained inability to access international capital markets; (ii) need for large policy adjustments (unless
credibly set in train); (iii) a public debt position that is not sustainable with high probability; (iv) widespread
bank insolvencies. Under the qualification frameworks, an eligible member should also be assessed to have
very strong or sound institutional policy frameworks for the FCL and the PLL, respectively.
Box Table 1. FCL and PLL Qualification Criteria/Areas

I. External position and market access 1. A sustainable external position
2. A capital account position dominated by private flows
3. A track record of steady sovereign access to capital markets at
favorable terms
4. A reserve position which remains relatively comfortable
II. Fiscal policy 5. Sound public finances and a sustainable public debt position
III. Monetary policy 6. Low and stable inflation, in the context of a sound monetary and
exchange rate policy framework
IV. Financial sector soundness/supervision 7. A sound financial system and the absence of solvency problems that
may threaten systemic stability
8. Effective financial sector supervision
V. Data adequacy 9. Data transparency and integrity
The new instrument qualification framework would aim to continue ensuring strong fundamentals
and policies, while relying on a more parsimonious set of criteria to enhance transparency and
predictability. In particular, qualification for a new instrument could be based on three criteria: (i) a
sustainable external position and market access, including adequate reserve coverage, sustainable external
debt, and no significant exchange rate misalignment; (ii) sound public finances, as indicated by a sustainable
public debt position with high probability; and (iii) no actual BOP need at approval. Moreover, an
arrangement would not be approved for a member facing (i) bank solvency problems that pose an
immediate threat of a systemic banking crisis; (ii) ineffective financial sector supervision; and (iii) insufficient
data transparency and integrity.
Prequalification, the early repurchase expectations, and lower access than the FCL or PLL would all
help safeguard Fund resources. Moreover, the annual reassessment of qualification, and the early
repurchase expectations would help ensure that eligible members can be relied upon to undertake
appropriate policy adjustments.

33. Financial resources necessary to establish a new liquidity backstop could be

comfortably accommodated within the current envelope. As shown in Figure 8, net outflows for a
group of 21 large EMs during recent episodes of short-term volatility were manageable relative to
normal access limits for many countries, although such limits generally fell short of reserve-currency
BSAs for those countries that could avail of them. For example, an EM-wide short-term volatility
shock23 would imply total liquidity requirements of around US$90 billion, which is equivalent to the
largest existing FCL arrangement. And even in such a situation, the Fund would not be called upon
for the full amount, as countries would be expected to partly cover the needs with reserves.24 As an
additional safeguard, the instrument could include a clause whereby the policy is subject to a Board
review if the resource demands exceed a specified threshold.25
B. A New Policy Monitoring Instrument
34. With many countries needing to access several elements of the global safety net to
fully cover their financing needs, better coordination is essential. While global resources have
become increasingly decentralized—spread across and between different safety net layers—
coordination has lagged behind. Fund experience working with some RFAs has identified areas for
improvement, while cooperation with others still remains wholly untested.26 With many countries
needing to tap multiple sources of liquidity support to fill financing gaps in the event of shocks,
there is renewed interest in strengthening coordination mechanisms that can help unlock access to
different layers of the safety net. To assist members that do not wish to tap Fund resources but are
seeking financing from other sources (RFAs, other international financial institutions (IFIs), or private
investors), a credible policy monitoring instrument could facilitate a more efficient allocation of
global resources and help reduce moral hazard by incentivizing stronger policies and reduce the
problems associated with facility shopping.
35. There has long been demand from members for the Fund to provide policy monitoring,
including for signaling purposes. The Fund provides policy guidance, monitoring and, often as a
by-product, signals about a country’s economic developments and policies through its operations.
There are three main reasons why the Fund may be perceived as well-placed to play this role. First,
the Fund may have better information than other official agencies and possibly some private agents
through special access to policymakers, as well as institutional knowledge and experience. Second,
country authorities may see the Fund as a desirable channel through which to demonstrate
23
Calculated for each EM as the 5th percentile of net quarterly portfolio outflows from 2006 to 2016–see Figure 8.
24
Of course resource needs for tail events, of the sort discussed in the Adequacy of Fund Resources paper, would be
many times larger and call for alternative forms of financing under the exceptional access criteria.
25
Nevertheless, the backstop would have an impact on the Fund’s liquidity position. A liquidity backstop would imply
a direct, semi-permanent call on Fund resources and there could also be important second-round effects on Fund
liquidity, by removing members from the Fund’s Financial Transactions Plan (FTP) in the event they draw under the
facility to meet emerging actual BOP needs. Accordingly, the potential magnitude of second round effects would
need to be kept under review and, if necessary, consideration could be given to increasing the size of the prudential
balance. A backstop could also have implications for members of the FTP, as potential drawings would tie up part of
reserves (at least for non-reserve currency issuers), resulting in lower returns.
26
See Crisis Program Review, IMF Policy Paper, November 2015.

commitment to sound policies (its signals are viewed as credible). Finally, Fund engagement through
a financing arrangement would provide comfort that the member has access to—or can quickly
mobilize—additional resources.
36. As the GFSN has evolved into a more multi-layered system, the mechanism through
which the Fund interacts with other elements and countries also needs to adapt. In light of the
developments discussed above, there are two broad contexts in which countries would benefit from
closer cooperation with the Fund, without the need for Fund financial resources:
• Catalyzing financing from other GFSN layers. Despite the increased capacity of RFAs to provide
actual and precautionary financing for balance of payments needs, many continue to request
some form of Fund involvement. The newer layers of the GFSN have yet to fully develop their
expertise to assess economic performance, prospects, policies and institutions; some have
outsourced––at least partially––this role to the Fund (e.g., CMIM and BRICS CRA). This more
decentralized GFSN creates a need for more structured collaboration and coordination with RFAs
and bilateral lenders and donors. Such a mechanism would also benefit countries seeking
financial assistance from other IFIs and could replace the provision of assessment letters in cases
where a more in-depth Board-endorsed assessment and monitoring may be needed.
• Signaling commitment to a policy reform agenda. A new government or a non-member

government may often want to signal commitments to a new policy agenda and a “break from
the past.” In such instances, Fund engagement can help countries demonstrate commitment to
sound policies and alleviate concerns about time inconsistency, in which a government attracts
financing—private or official—by promising sound policies, only to renege on them once the
financing is provided. A signaling mechanism that does not involve Fund resources but maintains
upper credit tranche (UCT) level conditionality could fulfill the same role as a Fund
arrangement.27
Past Fund Experience
37. In the past, the Fund has created a number of instruments for the primary purpose of
signaling and policy monitoring. The historical experience provides valuable insights into the
trade-offs involved in designing an effective signaling mechanism.28 The key issues that have been
raised are:
• The risk of becoming a “rating agency.” There is a tension between informing creditors, often
described as the Fund’s catalyzing role, and a desire to leave markets to their own judgment
when assessing risk and allocating resources. The Fund has avoided being perceived as a
27
The standard of UCT aims at ensuring that: (i) policies will allow the member to solve its balance of payments
difficulties in a manner consistent with the Articles of Agreement; (ii) the likelihood the Fund gets repaid is high,
allowing it to meet its fiduciary responsibilities; and (iii) the Fund gets repaid reasonably quickly, consistent with the
revolving nature of its resources. In the context of a monitoring and signaling instrument, this standard can be
interpreted as signifying policies that are sufficient to correct any external imbalances within the program period.
28
See Signaling by the Fund—A Historical Review, IMF 2004.

“gatekeeper” or “rating agency” at the risk of weakening market discipline and shifting focus
towards certifying potential borrowers. As financial markets have matured and there is increased
availability of economic information, however, there may be fewer grounds for concern that
private creditors would rely excessively on the Fund’s judgment.
• The difficulty in sending explicit negative signals. Negative signals can play a role in fostering
sound policies and also provide credibility and power to positive signals. In practice, there has
been a reluctance to send explicit negative signals at the risk of damaging the relationship with
the authorities and impacting their access to financing. This issue is intensified when signals are
blunt on/off mechanisms. While this challenge also exists for surveillance and Fund financing
arrangements, it is mitigated (as noted above) by the growing abundance of economic
information in most countries, such that the Fund alone is unlikely to bring a sudden and
unexpected reassessment of prospects in a country. In addition, the signaling mechanism could
be designed to provide a multi-dimensional assessment, eschewing a simplistic on-track/off-
track accounting, provided that policy conditionality is equivalent to UCT standard.
• The credibility of signals without the backing of Fund financing. The lack of a commitment
of the Fund’s financial resources could weaken the signal as the Fund does not have a financial
stake, unlike other official or private creditors. However, a contrary perspective is also possible:
without pressure to provide financing, the Fund could be seen as a more impartial external
assessor.
• Misinterpretation if standards are not upper credit tranche (UCT). The standard of UCT
conditionality is so well-known that any other standard applied by the Fund in a signaling
context could be misinterpreted as equivalent. This would risk undermining the quality of the
signal and could adversely affect the perception of UCT-quality programs.
• Tension between on/off signals and more multidimensional assessments. When there are
on/off signals, such as if a review is completed or delayed, there can be tendency to give less
weight to the multidimensional signal. For example, creditors may place greater importance on
the mere presence of an arrangement rather than the content of its assessments. To alleviate this
risk, a new signaling mechanism would need to be accompanied by a clear communication
strategy to emphasize the importance of the overall assessment provided in reviews.
Policy Monitoring Tools in the Current Fund Toolkit
38. Existing forms of policy monitoring are not appropriate or available in all cases. Within
the current toolkit, there are some mechanisms that can play the role of providing policy monitoring
and signaling. However, when assessed against the challenges of past experiences and the desire to
ensure adequate coverage for all members, it is clear that important gaps remain.
39. Policy monitoring could be achieved through surveillance, but the standard against
which policies are assessed would not provide a clear signal. Under the Fund’s surveillance
mandate, Article IV consultations provide policy advice and periodic assessments of the economic

outlook and policies of each member, typically once a year. However, it would not be clear what
standard policies are assessed against. In addition, there are cases where more frequent monitoring
is warranted but this is not possible under the current Article IV surveillance framework.29
40. Assessment letters and staff monitored programs (SMPs) play a signaling role but do
not involve Board endorsement of policies and are designed for different objectives.
Assessment letters are typically produced in response to requests from multilateral or bilateral
donors or creditors when an up-to-date Board assessment is not readily available.30 They should
provide a clear and candid assessment of the member’s macroeconomic conditions and prospects,
and of macroeconomic and related structural policies. But they do not assess policies against any
prescribed standard, and are generally not published. This limits their effectiveness as a mechanism
for enhancing policy dialogue and monitoring. While staff-monitored programs do enable program-
type engagement they are only used for the purpose of allowing countries to build a track record in
anticipation of an eventual Fund-supported program, and not for signaling purposes. In addition, as
with assessment letters, they do not entail an endorsement of policies by the Fund’s Executive Board.
41. While arrangements used on a precautionary basis or the Policy Support Instrument
(PSI) can be effective monitoring and signaling instruments, they are only available for a
subset of the membership. A Fund arrangement used on a precautionary basis (e.g., SCF
arrangement or SBA) can provide closer monitoring and a clear signal but would not be available for
members that have no present, potential, or prospective need to draw on Fund resources, for
instance because of substantial market access and/or access to other official sources of financing.
Moreover, if the member’s primary interest is to benefit from the structured policy engagement and
signaling that the Fund can provide, it would be preferable to deliver this support via a monitoring
program rather than tying up Fund resources in an arrangement used on a precautionary basis. The
PSI provides such support but its availability is restricted to a subset of PRGT-eligible countries that
have no present or prospective balance of payments need, do not require any significant
macroeconomic policy adjustment and have sufficient quality of institutions and policies. The PSI
helps such members design, implement and monitor policies as well as provide a Board-endorsed
signal to donors and investors. There is, however, no comparable form of support available to the
large majority of Fund members who are not eligible to use the PSI.
42. There is scope for improving the toolkit by building upon the experience with the PSI.
This experience highlights the value that countries, creditors and donors place on the policy
elements of a Fund-monitored program. Yet, there seems to be more limited value from the signal
provided by the qualification feature of the PSI, and there is often a reluctance to disqualify countries
even if performance deteriorates (see Box 5). In addition, there also seems to be a tendency to
complete reviews even when there are indications that more time is needed to
29
See Decision on Article IV Consultation Cycles (Decision No. 14747–(10/96)).
30Specifically, an assessment letter would be called for if either (i) the most recent assessment is more than six
months old, or (ii) if Fund staff considers that there have been material changes in the country’s circumstances that
call for an updated assessment.

Box 5. Experience with the Policy Support Instrument (PSI)

The PSI was introduced in 2005 to address a gap in the toolkit for PRGT-eligible countries that do not
need Fund financial assistance. The PSI offers support to low-income countries (LICs) that have achieved
macroeconomic stability and completed basic structural reforms, and do not need Fund financial assistance.
For this group of countries, the PSI aims to promote a close policy dialogue with the Fund to help the
member consolidate macroeconomic stability and pursue more advanced structural reforms, provide regular
assessments of the member’s economic and financial policies, and deliver clear signals that could be taken
into account by donors, creditors, and the public.
Since its introduction, the PSI has been used by seven countries. A total of 18 PSIs have been approved
to date in the following countries: Cape Verde (2), Mozambique (3), Nigeria (1), Rwanda (2), Senegal (3),
Tanzania (3), and Uganda (4). Cases of concurrent use with Fund financial arrangements (to address short-
term needs that arise during the implementation of a PSI) have been limited, with only three countries
requesting an SCF (Tanzania 2012, Mozambique 2015, and Rwanda 2016).
Official creditors and donors value the signals provided by the PSI and use them in their aid
allocation decisions. In a recent staff survey of donors in countries that are PSI users, all respondents
agreed or strongly agreed that the PSI delivers clear and timely signals on the strength of country policies.
Sixty percent of respondents also indicated that, to varying degrees, the PSI signals have played an
important role in their aid allocation decisions, particularly in assessing countries’ commitment to sound
macroeconomic policies and management. Donors appreciate their collaboration with the Fund through the
PSI, which provides a regular macroeconomic assessment and policy advice that complements the work of
individual donors focusing on more sectoral issues. In past surveys, donors also indicated that the PSI was
more useful than a surveillance-only relationship in making aid decisions.
PSI users have consolidated economic stability but evidence of sustained improvements in the
implementation of structural reform is limited. Quantitative program targets, are generally met, but
structural benchmark performance is inconsistent and weakening over subsequent PSI programs
(Text Figure 1). The latter could be due to the difficulty of implementing second-generation reforms that
follow-up PSIs aim to tackle. It could also be affected by the fixed review schedule under the PSI, which lacks
the flexibility to meet targets with a delay.
Text Figure 1. Adherence to Conditionality in PSI Users (last ECF/PRGF and successive PSIs)
Implementation of Performance Criteria Conditionality Implementation of Structural Benchmark Conditionality

100% 100%
ECF PSI1 PSI2 PSI3 PSI4
80% 80%
60% 60%
40% 40%
20% 20%
0% 0%
Mozambique Rwanda Senegal Tanzania Uganda Mozambique Rwanda Senegal Tanzania Uganda
Overall, program performance with the PSI is not weakened by the absence of Fund financing.
Comparing PSI users with similar PRGT-eligible countries that are using Fund financial facilities, the
experience shows that:1
_________
1 As part of the 2008–09 lending reforms, structural performance criteria were discontinued and monitoring of
structural reforms became review-based, though quantitative performance criteria were maintained. Evidence
suggests that this did not lead to a weakening in the implementation of the structural reform agenda (see the
2015 Crisis Program Review, IMF 2015).

Box 5. Experience with the Policy Support Instrument (PSI) (concluded)

• PSI programs have less conditionality relative to comparator countries and other PRGT-eligible
countries. This could be a reflection of PSI users having implemented first generation structural reforms
and are now aiming for second-generation issues.
Extent of Conditionality Implementation of Conditionality
18 100%
16 Number of conditions per reivew Percent met per review
80% Benchmarks Assessment/Performance Criteria
14
12
60%
10
8
40%
6
4 20%
2
0 0%
PSI PRGT Comparators PSI PRGT Comparators
• PSI users typically have a higher fiscal deficit

compared with comparable PRGT-eligible countries,
in part explained by the scaling-up of investment.
While the macroeconomic performance of PSI users
and their comparators is generally similar (reflecting
the selection criteria for the comparators), PSI users
have higher fiscal deficits and public investment
levels. A regression analysis indicates that the
difference in fiscal deficit is driven essentially by
higher investment by PSI users. Once investment is
accounted for, being a PSI user per se is no longer
associated with higher fiscal deficits.
The quality of signaling from the PSI may have been somewhat less sharp in recent years. Governance
issues have affected some PSI users (corruption and large non-transparent off-budget spending) even
though their macroeconomic performance has been broadly fine. Given that the assessment of performance
under a PSI is mostly focused on macroeconomic issues, this allows completion of a review in circumstances
where donors have withheld financial support due to governance issues. Also, the fixed review schedule
under the PSI could put pressure for completion of reviews to the detriment of performance: in ten years,
the only case where a review under the PSI was not completed is that of Uganda in 2011.
implement reforms—a phenomenon driven in part by the fixed review schedule. To help overcome
these design issues in the PSI and create an instrument that could be used by a wider set of
countries,31 a new monitoring instrument could have the following characteristics:
• Avoid qualification criteria, to permit access for all countries. The main motivation for
creating the PSI’s distinct qualification criteria was to provide an on/off signal that identifies a
subset of countries which have reached higher standards in terms of macroeconomic stability.
Since the motivation for a new instrument is to enable a broader set of countries to benefit from
31
As with the PSI, Fund engagement via the proposed new monitoring instrument would be a form of technical
assistance (TA) (Article V, Section 2(b)). Fund TA to non-members is permitted with approval of the Executive Board.

Fund policy monitoring, establishing qualification criteria would unnecessarily restrict access for
some countries, result in additional tiering in the membership, and possibly further contribute to
stigma. The value of the instrument would derive from the policy dialogue and monitoring
provided by the ongoing reviews rather than the binary signal of access to the instrument.
• Require UCT-quality policies, to provide a transparent and consistent standard. The UCT
quality of policies is a clearly established standard that is applicable in programs with Fund
financing. Maintaining this standard would be important in a new instrument that could be used
to unlock financing from other GFSN components.
• Use review-based monitoring of conditionality to provide a clear signal on program

performance and reduce stigma. Review-based monitoring of quantitative and structural
reform conditionality would explicitly recognize that program reviews provide the context for a
more robust and “real-time” assessment of program implementation.32 Quantitative targets and
structural reforms would remain central to program design but their monitoring would be
modified to help reduce stigma. Specifically, countries would not need to be granted a formal
waiver if a particular target is missed, as is currently the case with the PSI. Emphasis would be
placed on the staff and Board assessment, which would provide a bottom-line appraisal as to
whether policies are on track to meet the specified objectives, rather than focus on small
deviations from specific targets.
• A more flexible review schedule to limit pressure to complete reviews but maintain regular
updates on program performance. Committing to a fixed review schedule (e.g. every six
months) ensures that information on program performance is provided regularly but can also
result in pressure to complete reviews to avoid sending an overly negative signal. Creating a
limited time buffer around reviews would enable some extra time if there are delays in
implementation but avoid prolonged periods without an update on progress.
• Enable accelerated access to Fund-resources if needed. As is currently the case under the PSI,
if the monitoring program is on-track this could expedite access to Fund financing in the event of
a member’s balance of payments need, subject to existing lending policies.
43. To maintain a streamlined toolkit, consideration could be given for the new instrument
to replace the PSI. The proposed monitoring instrument would enable a broader set of countries to
engage more closely with the Fund. If introduced, it could replace the PSI, perhaps after a trial period
that would help the Board decide whether the new instrument has rendered the PSI obsolete.33
32 As part of the 2008–09 lending reforms, structural performance criteria were discontinued and monitoring of
structural reforms became review-based, though quantitative performance criteria were maintained. Evidence
suggests that this did not lead to a weakening in the implementation of the structural reform agenda (see the 2015
Crisis Program Review, IMF 2015).
33
A comprehensive review of LIC facilities, including a review of the PSI, is planned for 2018. The experience with the
new policy monitoring instrument (if adopted in due course) could inform that review.

VI. ISSUES FOR DISCUSSION

44. In this paper, staff has presented a number of avenues for further Fund toolkit reform to
help address remaining gaps in the GFSN. In responding to the staff’s analysis and suggestions,
Directors may wish to address the questions below. In light of Directors’ views, staff could come back
with subsequent papers that lay out specific proposals in detail.
• Do Directors agree that there are remaining gaps in the Fund’s toolkit?
• Do Directors agree that stigma remains an important concern that we should continue to
address, including through new instrument design?
• Do Directors agree that remaining gaps are potentially best addressed through new instruments,
rather than modification of existing instruments?
• Do Directors agree that there is a potential case for a new liquidity support instrument?
• Do Directors see merit in creating a new monitoring instrument?

Annex 1. Fund Facilities Serving Liquidity Needs for

Members with Strong Policies
The Fund first considered facilities for helping members with strong policies deal with financial
market volatility in the early 1990s, although the proposal for a Short-Term Financing Facility (STFF)
was never adopted. Its successor, the Contingent Credit Line (CCL), was established in 1999 against
the backdrop of financial contagion during the Asian crisis. The CCL was never used, however, in part
due to stigma concerns and because it was perceived to be insufficiently automatic and predictable.
The Short-term Liquidity Facility (SLF), established at the outset of the global crisis, was quickly
replaced by the Flexible Credit Line (FCL) which aimed to address such concerns more forcefully. The
Precautionary Credit Line (PCL) and its successor, the Precautionary and Liquidity Line (PLL), were
introduced to spread some of the FCL’s benefits to a wider range of members. However, both
facilities have seen only limited use thus far.
Contingent Credit Line (CCL)
The CCL was established in May 1999, following the Asian financial crisis, to provide members
with strong economic policies with a precautionary line of defense against contagion. The CCL
was to provide higher and more frontloaded access (with shorter maturities) than conventional
precautionary SBAs/ EFFs. Key design features included a formal request that encapsulated
prescreening (ex-ante conditionality) as well as an activation review required to make an initial
purchase of a substantial portion of access. Importantly, Board approval was conditional on
determining that contagion was indeed the source of the member’s problems.
The CCL expired in November 2003 without having ever been used. One reason for the lack of
interest was stigma concerns related to the signal potentially conveyed by a CCL request; relatedly,
members anticipated uncertainty in case a country with a CCL was no longer deemed eligible at a
future point in time. Moreover, the instrument was seen as insufficiently automatic and predictable,
both due to a lack of clarity of eligibility criteria and as a result of the complexity of procedures for
activation. The need to establish that a member’s balance of payments needs were indeed driven by
contagion was seen to further complicate activation.
Short-term Liquidity Facility (SLF)
The SLF was established in October 2008 amid the liquidity squeeze in global financial
markets. It aimed to help members with very strong policies and fundamentals deal with self-
correcting and quick-reversing BOP needs, subject to pre-qualification and absent ex-post
conditionality. As such, the facility addressed the concerns that weakened the CCL in part. Following
an expression of interest, members facing temporary liquidity problems would be permitted
purchases up to a cumulative limit of 500 percent of quota subject to a Board decision that eligibility
criteria are met. Repurchases would have to be made three months from the relevant purchase.
While the SLF was terminated in 2009, and thus too early to establish conclusively lack of
member interest, several design issues kept members away from the instrument. These

included (i) the outright purchase nature of financing, which prevented use on a precautionary basis;
(ii) the capped access and short repurchase period; and (iii) high borrowing service charges when
purchases are made.
Flexible Credit Line (FCL), Precautionary Credit Line (PCL) and Precautionary and Liquidity Line (PLL)
The FCL was established in March 2009 to provide large, upfront precautionary financing to
members with very strong fundamentals and policies. In line with the SLF, the FCL aims to reduce
stigma and increase predictability by entailing no ex-post conditionality. It further includes an ex-
ante qualification framework and is established as a window in the credit tranches. As such, it can be
used to address (potential or actual) financing needs stemming from any type of balance of
payments problem. In the same spirit of increasing flexibility and predictability, there are no
restrictions on requesting a successor arrangements and, in August 2010, the initial cap on access
was lifted.
The Fund created the PCL in August 2010 to spread some of the benefits of the FCL to a larger
subset of the membership. Both access and the qualification bar are correspondingly lower than in
the FCL, although PCL eligible members were required to have sound fundamentals and policies. In
light of potentially remaining vulnerabilities, the PCL combined ex ante conditionality (qualification
criteria) with focused ex-post conditionality. The PCL was renamed PLL in November 2011 to reflect
the decision to make it more flexible through broadening eligibility to members with actual balance
of payments needs and creating a six-month liquidity window under the facility.
Usage of the FCL and PLL remains modest despite the recent period of elevated market
volatility, reflecting a number of reasons. First, the high qualification bar may have limited the
number of potential qualifiers, some of which see no need for additional insurance given existing
external buffers. Second, qualification criteria may not have been clear enough, especially for the PLL,
as the minimum standard for eligible members is difficult to identify. Third, stigma concerns related
to the need to approach the Fund remain, in part, due to the lack of pre-qualification. Indeed,
members may have been reluctant to request Fund financing individually for fear of negative public
perception in the event that none of their peers would end up doing so (first mover problem). Finally,
the introduction of multiple instruments has created a system of tiering that was partly intentional
but may have made the PLL less attractive.
Six-Month PLL Liquidity Window
The creation of the PLL allowed for arrangements with shorter duration as a platform to
address the needs of crisis bystanders during periods of heightened stress and contagion. The
6-month PLL can be approved based on an actual or potential balance of payments need, although
such need would have to be of a short-term nature such that it can generally be expected to make
credible progress in addressing its vulnerabilities during such six-month period. All other
qualification criteria would be the same as in a PLL with longer duration. Repeat approval of
6-month PLL arrangements is limited to prevent usage to meet balance of payments needs that are

not of a short-term nature. Similar to an FCL, the 6-month PLL would, in turn, not be subject to a
review or to other forms of ex-post conditionality beyond the standard performance criteria.
There has thus far been no sign of interest in the 6-month PLL. While the almost non-existent
ex-post conditionality1 may have attenuated stigma concerns compared to a PLL of longer duration,
the 6-month PLL is likely subject to the same concerns regarding the high bar and limited
predictability of qualification. Similarly, the tiering between FCL and PLL may have limited the use of
PLL arrangements of both short and longer duration. Due to the requirement to identify balance of
payments needs of a short-term nature, the qualification process for the 6-month PLL may be
perceived to be especially complicated. Finally, limiting repeat use of the instrument may have
further reduced its attractiveness.
1
6 month PLL arrangements still require standard continuous performance criteria. Prior actions are also possible
when needed.

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IMF POLICY PAPER

ADEQUACY OF THE GLOBAL FINANCIAL SAFETY NET—

Electronic copies of IMF Policy Papers

International Monetary Fund

© 2017 International Monetary Fund

Executive Board Assessment––November 9, 2016

Executive Directors welcomed the preliminary discussion of potential reform to the

These positive developments notwithstanding, most Directors shared the assessment

Directors considered the merits of a new liquidity instrument to complement other

Directors expressed a range of views on the prequalification feature of a possible

Directors highlighted the importance of maintaining coherence within the Fund’s

In light of today’s discussion, and following additional consultations and outreach,

Executive Board Assessment—June 30, 2017

Directors reiterated the importance of maintaining a streamlined and coherent toolkit.

Executive Board Assessment––December 6, 2017

Approved By Prepared by an interdepartmental staff team from the Strategy, Policy

II. GROWING DEMAND FOR LIQUIDITY _______________________________________________________ 5

III. A LARGER GFSN, BUT WITH GAPS _________________________________________________________ 9

IV. THE FUND LENDING TOOLKIT: REFORMS AND GAPS ____________________________________ 11

V. REFORM OPTIONS _________________________________________________________________________ 17

VI. ISSUES FOR DISCUSSION __________________________________________________________________ 29

2 INTERNATIONAL MONETARY FUND

5. Eroding Buffers and Increasing Vulnerabilities in Emerging Markets ___________________________ 8

INTERNATIONAL MONETARY FUND 3

• develop non-financial instruments, such as a policy monitoring instrument covering emerging

4 INTERNATIONAL MONETARY FUND

II. GROWING DEMAND FOR LIQUIDITY

INTERNATIONAL MONETARY FUND 5

banking crisis debt crisis

60 ERM crisis Asian

Source: IMF calculations.

6 INTERNATIONAL MONETARY FUND

Normal acces limits vs. EPRF flows during recent

RMB Devaluation (Aug 2015)

INTERNATIONAL MONETARY FUND 7

Figure 4. Financial Pressures in Emerging Markets

70 VIX Taper talk

Figure 5. Eroding Buffers and Increasing Vulnerabilities in Emerging Markets

25th/75th percentile Median RUS

MEX PER 300

Source: IMF calculations.

8 INTERNATIONAL MONETARY FUND

III. A LARGER GFSN, BUT WITH GAPS

INTERNATIONAL MONETARY FUND 9

Box 1. A Diagnosis of the Current GFSN

Characteristics Reserves Swaps IMF RFAs Hedging

Reserve Systemic and

10 INTERNATIONAL MONETARY FUND

IV. THE FUND LENDING TOOLKIT: REFORMS AND GAPS

INTERNATIONAL MONETARY FUND 11

Box 2. Recent IMF Toolkit Reforms

12 INTERNATIONAL MONETARY FUND

Table 1. Current General Resource Account (GRA) Toolkit

Figure 6. “De jure” GRA Toolkit

FCL FCL SBA EFF

INTERNATIONAL MONETARY FUND 13

Figure 7. “De facto” Use of Fund Arrangements 2009–16

FCL SBA EFF

• Reliability––For Fund resources to be reliable sources of financing in periods of stress,