IMF assistance: permanent emergency?
On October 5 the IMF Executive Board approved two additions to its policy toolkit:
A “Food Shock Window” (FSW) within its emergency financing tools, the Rapid Financing Instrument (RFI, from the General Resource Account) and the Rapid Credit Facility (RCF, from the Poverty Reduction and Growth Trust, i.e. for lower income countries)
A new type of Staff Monitored Programs with Board Involvement (PMBs)
While I’m yet to grasp the precise intricacies of these announcements, the creation of PMBs looks like a way for the IMF to cope with the persistence of emergency financing instruments as the world faces a series of shocks. The subsequent delay in the transition to full-fledged IMF Upper-Credit Tranche (UCT) programs could in turn have a series of unintended consequences.
A growing use of emergency instruments in the wake of the pandemic
As a background, it is worth remembering that the IMF made good use of its emergency financing toolkit as soon as the COVID-19 pandemic broke out, with almost 100 program approvals in 2020 and most of it (70) through RFI and RCF arrangements (see the excerpt below from the 2021 review of access limits).
The use of these financing instruments was meant as a temporary bridge towards full-fledged IMF programs. The IMF noted in December 2021:
This shift from EF to UCT-quality programs has been intended, as it allows for a more carefully calibrated approach tailored to country-specific circumstances. UCT-quality programs are better tailored to support reforms to address underlying BoP problems or vulnerabilities and larger financing needs. Absent the urgency associated with the rapid spread of the pandemic, the case for additional unprecedented EF support from the Fund is much weaker at this stage.
Despite a small increase in UCT programs take-up among PRGT-eligible countries, at end-2021 most of these PRGT countries with approved emergency financing did not have an ongoing UCT program (14 out of 51, see Annex II here, and the number has only marginally increased ever since).
In order to accelerate the transition towards UCT programs as the economic impact of the pandemic abated, the IMF staff recommended a return towards some sort of normality in terms of access limits:
Taking the above considerations and trends together, staff proposes to allow the temporarily higher annual access limits to expire and move towards restoring the coherence of the Fund’s risk management framework.
That was back in December 2021, an eternity ago and more importantly before Russia’s invasion of Ukraine.
A new window in the emergency financing toolkit
The creation of the FSW is hence motivated by the recent disruptions to food commodities markets brought about by this conflict and inflationary pressures across the board. It is expected to be available for a 12-month period following Board approval.
It will in effect increase access limits within the IMF’s emergency financing framework, with an access limit at 50% of quota for the FSW over the 12-month period, and a parallel increase of 25% of quota for cumulative access limits in another RFI/RCF window for countries making use of the FSW (see table 1 here for the details).
This is motivated, according to the IMF, by (i) the inadequacy of UCT programs in the wake of this shock for some countries due e.g. to policy implementation challenges, and (ii) the inadequate existing access limits under the emergency financing instruments which were not calibrated to deal with a shock of this magnitude.
Eligibility will be based on either a situation of food insecurity or an export shock - the latter being especially relevant for Ukraine. Food insecurity will more precisely be assessed in two ways: (i) countries facing a BoP crisis and suffering from food insecurity as per the assessment of the FAO/WFP, or the United Nations Global Report on Food Crisis (UNGRFC), (ii) countries facing a BoP shock related to the price increase of specific cereals and fertilizers worth at least 0.3% of GDP.
Bringing policy oversight into emergency financing
While it might be overlooked compared to the nitty-gritty of the FSW, the parallel creation of PMBs as a new form of Staff Monitored Programs (SMPs) might be a notable development in the way the IMF frames its financing assistance to member countries.
SMPs are usually "informal agreements" between the authorities and the IMF staff to monitor the implementation of reforms and contribute to establishing a track record towards UCT financing. The IMF Board doesn’t approve SMPs (with limited exceptions under HIPC), and is only informed of developments by the IMF staff.
In parallel, the IMF also has "UCT-quality" non-financing programs with board oversight: the Policy Support Instrument and the Policy Coordination Instrument (PSI/PCI). They require debt sustainability, and even absent IMF financing they need to be fully financed.
Under the new proposal, PMBs would be a subset of SMPs for which the IMF board would formally discuss the reform agenda and "opine" on its robustness. A summary of their assessment would be published in approval and reviews documents. This would place PMBs somewhat halfway between SMPs and PSI/PCI, whereby the Board would give its opinion but not formally approve and monitor.
Then comes the question: why the need for this “halfway point” in terms of Board involvement for some non-financing IMF programs? The answer is that these PMBs are apparently meant to “strengthen” the oversight of co-existing emergency financing programs which usually lack any such mechanism.
The IMF coincidentally writes in the proposal for the establishment of the FSW (paragraph 13) that countries seeking financial assistance through the FSW and for which a UCT program is “not feasible”, would be “strongly encouraged” to request a PMB in parallel if they also satisfy the following conditions:
A PMB would only be available to members that seek to establish or re-establish a track record for UCT-UFR, and either (i) are benefiting from an ongoing concerted international effort by the international community to provide substantial new financing/debt relief in support of the member’s policy program, or (ii) have significant Fund credit outstanding under emergency financing instruments at the time they obtain new emergency financing.
This is where it gets tricky. First, IMF financing is usually considered as a catalyzer for additional donor support precisely because of the strength of the policy monitoring as part of UCT arrangements. It remains unclear whether the IMF got some informal feedback from the membership indicating that a PMB would be sufficient to unlock bilateral grants and loans.
It might be even more difficult for the World Bank and other MDBs to approve support on the back of a PMB, since some of their instruments like budget support are often conditional on the approval of a UCT program.
Second, the usual solution for countries with significant credit outstanding under emergency financing instruments is, as indicated by the IMF itself, to transition towards UCT program with strong oversight. In terms of optics, it might be difficult for the Fund to avoid sending the message that they are parting ways with their existing risk management framework.
Towards permanent emergency?
Through the combined approval of the FSW and PMBs the IMF is trying to find a middle ground, attaching more oversight and accountability to its emergency financing, while retaining the flexibility of the instruments and not requiring a heavy Board approval process.
Overall the IMF finds itself in a difficult situation, with many frontier/emerging markets locked out of international financial markets, little prospects from new bilateral financing notably due to increased prudence from China, and risks to financial stability on domestic debt markets as noted in Chapter 2 of the latest IMF GFSR.
All these hurdles might make it difficult for countries to apply for UCT programs which need to be “fully financed” with commitments from creditors, as part of the financing assurances policies discussed in an earlier blog post.
This background, combined with the aforementioned economic shocks, makes a strong case for emergency support from the lender of last resort. However, almost three years into the COVID-19 pandemic, this could be looking more and more like a permanent turn to emergency instruments, reducing the incentive for countries to commit to broad and deep sets of conditionalities as part of UCT programs - not even mentioning implications for the IMF’s risk management framework.
One could think about it as Zugzwang financial assistance, echoing Daniela Gabor’s Zugzwang Central Banking. No good move is really available, e.g. approving rapidly a series of full-fledged UCT programs. Increased firepower for emergency instruments combined with PMBs can be a quick fix but might do little more than kick the can down the road. Indeed the IMF writes:
Directors underscored that members would be encouraged to transition to UCT-quality programs as soon as appropriate and feasible to support structural reforms to address underlying vulnerabilities and larger financing needs. In this context, they noted that concurrent use of the FSW with an SMP or, in certain cases, with a PMB, could be considered to build or re-build a track record towards a Fund arrangement that supports a UCT-quality program.
It looks like a replay of the wording seen at the heights of the COVID-19 pandemic. Since then, global economic conditions and the spillovers from the war in Ukraine have prevented the transition towards UCT programs. Unfortunately, prospects for such a return to normal look rather gloomy as the world braces for more economic shocks - not least these caused by the impending climate and nature crises.
This could cause additional problems, for instance because underlying UCT programs are also a prerequisite for accessing financing under the newly created Resilience and Sustainability Facility.
I am grateful to Mathilde Gassies for valuable comments.
If you want to discuss this further, please reach out: firstname.lastname@example.org
You can also follow me on twitter @TheoMaret