As support to Low-Income Countries’ (LICs) to fight COVID-19, the Executive Board of the International Monetary Fund (IMF) has approved a set of reforms to the Fund’s concessional lending facilities.
The global body announced, yesterday, that the Board also approved an associated funding strategy to support the long-term sustainability of the Poverty Reduction and Growth Trust (PRGT).
“These reforms are set to ensure that the Fund has the capacity to respond flexibly to LICs’ needs over the medium term while continuing to provide concessional loans at zero interest rates,” it said.
Fund lending to LICs increased dramatically in 2020—an eightfold increase from average lending levels in 2017–2019—and is projected to continue at elevated levels for several years, as LICs seek financial assistance to help them respond to and recover from the pandemic.
IMF said that the bulk of future financial assistance would be provided through multi-year lending arrangements which represented a shift from 2020, when most assistance was provided through the Fund’s emergency financing facilities.
The organization explained, “The centerpiece of the approved policy reforms is a 45 percent increase in the normal limits on access to concessional financing, coupled with the elimination of limits on access to the poorest countries provided their economic programs meet the requirements for obtaining above-normal access.
“These higher access limits will allow provision of more concessional support to countries with large balance of payments needs that are implementing strong economic programs to restore inclusive growth, while maintaining sustainable debt positions.
“To support concessional financing to LICs through the PRGT, grant resources are needed to cover the costs associated with providing zero-interest lending. In 2019, the PRGT was assessed to have sufficient resources to finance interest subsidies on the Fund’s concessional lending on a self-sustaining basis over the long term.
“However, the volume of pandemic-linked lending—already provided or expected to be provided in the next few years—far exceeds what had been anticipated or previously recorded, creating a sizable shortfall in the necessary resources.”
The world body added that the Executive Directors supported the proposed package of reforms to the concessional financing facilities and the associated two-stage funding strategy to ensure sustainability of concessional lending.
It said, “Directors agreed that low-income countries (LICs) have been particularly hard hit by the COVID-19 pandemic and would face significant challenges in achieving sustainable inclusive growth in the coming years.
“They noted that the Fund has responded quickly to provide financial support to LICs at an unprecedented scale, and, looking ahead, should continue supporting countries that are implementing strong economic programs aimed at recovering from the pandemic and raising living standards.
“They supported the proposed increases in limits on normal access to resources of the Poverty Reduction and Growth Trust (PRGT) and the removal of the limits on exceptional access for the poorest countries.
“Directors supported the staff proposal to closely align the PRGT exceptional access criteria with the requirements of the Policy Safeguards on High Combined Credit, while retaining the current feature that only poorer LICs are eligible for exceptional access to the PRGT.
“Directors commended the exceptional response by donors to financing requests from the Fund during the past 18 months.
“They recognized that the support now being requested is substantial, even if spread over several years, but underscored that the PRGT has played a vital role in the response to the pandemic and, if adequately supported, would continue to provide essential support to LICs during the recovery and beyond.”