The report, covering more than 70 low-income countries eligible to receive concessional IMF resources, also presented new evidence that IMF support had played a positive role over the longer term in raising growth, reducing poverty, and strengthening poorer countries’ resilience to shocks.
The report, which was discussed by the IMF Executive Board on September 6, also presented proposals to address a sharp prospective drop in the IMF’s concessional lending capacity after 2014, and ensure that resources are used efficiently by tailoring them better to countries’ needs. IMF staff will prepare two further reports, with recommendations on how to implement these proposals, based on Directors’ feedback.
Experience with new instruments
The 2009 reforms aimed to close gaps and to create a streamlined architecture of facilities that is better tailored to the needs of low-income countries.
Subsequently, demand for support from the IMF for countries’ programs has been high, and shifted to a more diverse range of facilities (see Chart 1). The use of facilities has been greatest among the poorer low-income countries and those eligible for the Heavily Indebted Poor Countries debt relief program and has increased strongly for small and fragile economies.
Many members utilized the increased operational flexibility under the 2009 reforms, but recent experience has highlighted a few areas where streamlining and greater flexibility could enhance the IMF’s ability to respond effectively to members’ needs.
Impact of IMF engagement
The report presented new empirical evidence that points to two possible channels through which IMF support may have helped low-income countries weather the recent global financial crisis.
First, longer-term IMF support via successive medium-term programs—primarily under the Extended Credit Facility and its predecessors, and more recently under the Policy Support Instrument—seems to have helped low-income countries in raising longer-term growth, reduce poverty, raise social spending, and gradually building the macroeconomic buffers and institutional capacity needed for a robust policy response to the crisis.
“Our interpretation of these results is that medium-term-type support in low-income countries includes a strong element of capacity building, both directly through repeated missions that work with country authorities on budget preparation, monetary policy, institutional reforms and so on—and indirectly by identifying needed technical assistance and supporting donor efforts,” stated Christian Mumssen, who led the IMF staff team on the review.
Second, the IMF’s sharp increase in financial assistance in 2009 helped relax countries’ liquidity constraints at the height of the crisis, which allowed them to preserve or even increase government spending despite declining revenues. This countercyclical fiscal policy response—made possible by a combination of financing and stronger pre-crisis buffers—was a first for these countries. As a result, most low-income countries maintained positive growth even in the depths of the global recession, followed by a more rapid recovery than in past crisis episodes.
Assessment of facilities
The review, which took into account feedback from country officials, found that the IMF’s facilities for low-income countries included an appropriately diverse set of tools, including some that focus on medium-term policy support (Extended Credit Facility and Policy Support Instrument) and some that focus on short-term financing (Standby Credit Facility and Rapid Credit Facility).
Even in the absence of shocks or urgent financing needs, precautionary Standby Credit Facility arrangements or Extended Credit Facility arrangements with relatively low access levels can have a significant value for low-income countries, as they can provide both policy support (through well-designed macroeconomic programs) and insurance (through the possibility of disbursements in the event that shocks arise).
Future IMF Board decisions
Looking ahead, low-income countries will remain exposed to global risks and volatility. The report notes that a central challenge will be to preserve the IMF’s ability to provide effective policy and financial support to these countries. Given current resources, the IMF’s concessional lending capacity would drop sharply after 2014, and exceed expected demand by a considerable margin, even under a low case scenario. Consequently, the report argued that there is an urgent need to identify substantial additional resources for the Poverty Reduction and Growth Trust (PRGT).
Various approaches were considered to put the PRGT’s finances on a sustainable footing, including the use of resources linked to the remaining windfall profits from gold sales (amounting to SDR 1.75 billion), and mobilizing additional resources through regular fundraising. The IMF Board is scheduled to discuss proposals for the use of gold windfall sales at the end of September 2012.
In addition to creating a sustainable concessional financing framework, a follow-up paper is expected to propose a number of specific refinements to the instruments available to low-income countries based on the feedback received on the recent review. These modifications will seek to target resources more closely to individual countries’ balance of payments needs; differentiate financing terms better through greater use of blending; and increase the flexibility of existing instruments to provide contingent financing and policy support to low-income countries.