By Clara Nwachukwu
Executive Board of the International Monetary Fund (IMF), yesterday (Thursday), approved new policy reforms and a 45 percent increase in funding package to better support the recovery of Low Income Countries (LICs) From the COVID-19 pandemic.
The reforms seek to ensure that the Fund can flexibly support the LICs’ financing needs during the pandemic and the recovery while continuing to provide concessional loans at zero interest rates.
This is even as the Directors noted that with many LICs (comprising about 50 countries, including Nigeria) facing substantial debt vulnerabilities, the programme design needs to pay close attention to the expected evolution of debt burdens and the risk of countries falling into debt distress.
Recall that the World Trade Organisation (WTO) and the African Development Bank (AfDB), had warned countries in the continent against being plunged back into debt abyss.
IMF Directors had observed that “Higher levels of lending would mean higher credit risk to the Fund and a corresponding need for more in-depth analysis of capacity to repay the Fund.”
Therefore, the Directors supported the proposal to give enhanced attention to debt dynamics and capacity to repay in staff analysis and in programme documents. In this regard, Directors emphasized the importance of taking into account country-specific circumstances and called for the Fund to support capacity development in debt management.
A statement from the Fund said the 45 percent increase in the normal limits on access to concessional financing, coupled with the elimination of hard limits will enhance access for the poorest countries.
“These higher access limits will facilitate the provision of more concessional support to LICs with strong policies and large balance of payments needs,” the statement reads.
Furthermore, the Executive Board also approved a two-stage funding strategy to cover the cost of pandemic-related concessional lending and support the sustainability of the Poverty Reduction and Growth Trust (PRGT).
“The first stage of the strategy aims to secure SDR 2.8 billion in subsidy resources (to support zero interest rates), and an additional SDR 12.6 billion in loan resources which could be facilitated by the ‘channelling’ of SDRs.
Recall that on July 14, the Board had also approved a set of reforms to the Fund’s concessional lending facilities to better support LICs during the pandemic and the recovery, as well as an associated funding strategy to support the long-term sustainability of the 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.
With many LICs facing substantial debt vulnerabilities, the programme design needs to pay close attention to the expected evolution of debt burdens and the risk of countries falling into debt distress.
Fund lending to LICs increased eightfold in 2020, above 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.
The bulk of future financial assistance is expected to be provided through multi-year lending arrangements, a shift from 2020, when most assistance was provided through the Fund’s emergency financing facilities.
The IMF reasoned that the 45 percent increase will allow the provision of more concessional support to countries with large balance of payments needs that are implementing strong economic programmes to restore inclusive growth, while maintaining sustainable debt positions.
Capacities to repay
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.
Based on their assessment, directors agreed that 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 programmes aimed at recovering from the pandemic and raising living standards.
Directors also agreed that the proposed reform package would better position the Fund to respond to the needs of LICs for which they supported the proposed increases in limits on normal access to resources of the PRGT and the removal of the limits on exceptional access for the poorest countries.
Some Directors had, however, expressed concern about entirely removing the hard caps on PRGT exceptional access for poorer LICs, while suggesting that the new access limits should include a sunset clause set to coincide with the time of the next full review of concessional facilities.
Also, directors emphasized that access levels in individual Fund-supported programmes should continue to be based on a case-by-case assessment applying the established access criteria, including balance of payments needs, strength of economic programme, and capacity to repay the Fund.
In this context, most Directors underscored the importance of maintaining the Fund’s established role in catalysing financing from other sources, while noting that the Fund must respond to its membership’s needs in line with its mandate, particularly during crisis times.
They therefore supported the proposed simplification of access norms, while emphasizing that norms are neither a floor nor a ceiling on access levels in individual programme cases.