Sat, 27 Apr 2024
16:22:34
Financing Assurance:
17 Mar 2023
20:20:40
IMF Executive Board Concludes Changes to the Fund’s Financing Assurances Policy in the Context of Fund Upper Credit Tranche Financing Under Exceptionally High Uncertainty
Mar 17, 2023 (SLBO) - The Executive Board of the International Monetary
Fund (IMF) approved changes to the Fund’s financing assurances policy. The changes
apply in situations of exceptionally high uncertainty, involving exogenous shocks that are
beyond the control of country authorities and the reach of their economic policies, and
which generate larger than usual tail risks.
In situations of exceptionally high uncertainty, the Fund can provide emergency financing
to meet urgent Balance of Payments (BoP) needs of members, provided certain
safeguards are met. It is more challenging to provide support through an Upper Credit
Tranche (UCT) arrangement, which requires a Fund-supported program that resolves BoP
problems, restores external viability over the medium term, and provides adequate
safeguards.
The changes adopted would address key barriers to designing a Fund UCT program in
situations of exceptionally high uncertainty, in particular by modifying the Fund’s
financing assurances policies in two ways. The first change allows official bilateral creditors
to provide an upfront credible assurance about delivering debt relief and/or financing
with the delivery of a contingent second-stage element of debt relief and/or financing
once the exceptionally high uncertainty has been resolved. This would help establish that
medium-term viability is being restored. The second change extends the use of a
capacity-to-repay assurances from official bilateral creditors/donors from emergency
financing to a UCT arrangement context. This would help establish adequate safeguards.
These changes and their application to any specific country case in a situation of
exceptionally high uncertainty would require the Fund to weigh enterprise risks.
Therefore, along with these changes, the Board also established a procedural safeguard
for early consultation with Executive Directors about engagement under exceptionally
high uncertainty to determine whether these circumstances are present and whether the
Fund is prepared to accept the risks that a UCT arrangement would entail.
Executive Board Assessment:
Executive Directors welcomed the opportunity to consider reforms to the Fund’s Financing
Assurances Policy that would enable the approval of upper credit tranche Fund
arrangements (UCT arrangements) in cases of exceptionally high uncertainty. Directors
stressed that emergency financing through the Rapid Financing Instrument and/or Rapid
Credit Facility would generally be the appropriate modality for the Fund to support
members with urgent balance of payments (BOP) needs in the context of exceptionally
high uncertainty. However, stronger Fund engagement in a UCT context with a member
facing exceptionally high uncertainty might be deemed appropriate and consistent with
Fund policies in certain cases.
Directors agreed that a case of “exceptionally high uncertainty” is characterized by all of
the factors set out in paragraph 13 of the paper. Directors stressed that the assessment of
whether a case is one of “exceptionally high uncertainty” must be made in a manner that
ensures uniformity of treatment and evenhandedness across the membership.
Directors recognized that it is extremely difficult to design a UCT-quality arrangement in
cases of exceptionally high uncertainty. They supported the approach detailed in the
paper of setting out two fully elaborated scenarios in such cases, covering both a baseline
and a downside scenario, noting the need to demonstrate that a Fund-supported
program could work in both scenarios, and that these scenarios would need to be
sufficiently separated to generate confidence that the program could succeed and solve
the member’s BOP problem and restore the member to medium-term external viability,
notwithstanding the exceptionally high uncertainty about the ongoing shock. Directors
stressed that a member would need to have the capacity and commitment to implement
a UCT arrangement in such circumstances and to provide the necessary data for the Fund
to be able to monitor the program, and that a Staff Monitored Program or Program
Monitoring with Board involvement might first be necessary to establish a track record on
this.
Directors stressed that proceeding with a Fund-supported program in cases of
exceptionally high uncertainty would require careful judgment about whether such a
program would be feasible and credible given its likely risk characteristics, and be
consistent with legal and policy requirements for Fund lending. These requirements
include providing adequate confidence about the ability of the program to solve the
member’s BOP problem and restore the member to medium-term external viability, while
providing adequate safeguards for the repayment of the Fund’s financing. The Board
would need to make this judgement, based on a recommendation from Management and
staff, at the time of approval of the arrangement as well as at subsequent reviews.
Directors expected that, to the extent the exceptionally high uncertainty dissipates, the
program design would revert to the standard Fund approach to lending built just around
the baseline. In the event that the circumstances of exceptionally high uncertainty were to
deteriorate and questions arose about whether the level of confidence had become too
low to clearly and credibly establish a program design to resolve the member’s BOP
problem and/or restore debt sustainability, then Directors would need to determine
whether further financing under the arrangement would become infeasible.
To support the Fund’s ability to approve UCT arrangements in cases of exceptionally high
uncertainty, Directors endorsed the use of a procedural safeguard set out in paragraph 18
of the paper for an initial engagement with Executive Directors. Some Directors called for
a broader engagement than set out in the paper, with a few Directors calling for a formal
Board meeting.
Directors also supported two policy modifications, applying only to cases of exceptionally
high uncertainty, to allow UCT arrangements. First, Directors supported the modified
approach in cases of exceptionally high uncertainty set out in paragraph 25 of the paper
for official bilateral creditors to deliver credible upfront assurances covering their
commitments to help restore debt sustainability where contributions from official bilateral
creditors are needed to restore debt sustainability. Directors also endorsed the proposal
set out in paragraph 26 of the paper, for situations of exceptionally high uncertainty, to
extend the existing use of a capacity-to-repay assurance from official bilateral
creditors/donors to ensure adequate safeguards for the repayment of the Fund’s
financing from an emergency financing context to a UCT program context.
Directors welcomed the paper’s discussion of risks and noted that the proposed policy
changes involve considerable enterprise risks to the Fund while also noting the mitigants
to address these risks identified in the paper. However, they generally agreed that when
considering these risks—including reputational and spillover risks—the benefit of having
the option of supporting members facing exceptionally high uncertainty outweighs the
additional risk of the proposed policy change.
Fund (IMF) approved changes to the Fund’s financing assurances policy. The changes
apply in situations of exceptionally high uncertainty, involving exogenous shocks that are
beyond the control of country authorities and the reach of their economic policies, and
which generate larger than usual tail risks.
In situations of exceptionally high uncertainty, the Fund can provide emergency financing
to meet urgent Balance of Payments (BoP) needs of members, provided certain
safeguards are met. It is more challenging to provide support through an Upper Credit
Tranche (UCT) arrangement, which requires a Fund-supported program that resolves BoP
problems, restores external viability over the medium term, and provides adequate
safeguards.
The changes adopted would address key barriers to designing a Fund UCT program in
situations of exceptionally high uncertainty, in particular by modifying the Fund’s
financing assurances policies in two ways. The first change allows official bilateral creditors
to provide an upfront credible assurance about delivering debt relief and/or financing
with the delivery of a contingent second-stage element of debt relief and/or financing
once the exceptionally high uncertainty has been resolved. This would help establish that
medium-term viability is being restored. The second change extends the use of a
capacity-to-repay assurances from official bilateral creditors/donors from emergency
financing to a UCT arrangement context. This would help establish adequate safeguards.
These changes and their application to any specific country case in a situation of
exceptionally high uncertainty would require the Fund to weigh enterprise risks.
Therefore, along with these changes, the Board also established a procedural safeguard
for early consultation with Executive Directors about engagement under exceptionally
high uncertainty to determine whether these circumstances are present and whether the
Fund is prepared to accept the risks that a UCT arrangement would entail.
Executive Board Assessment:
Executive Directors welcomed the opportunity to consider reforms to the Fund’s Financing
Assurances Policy that would enable the approval of upper credit tranche Fund
arrangements (UCT arrangements) in cases of exceptionally high uncertainty. Directors
stressed that emergency financing through the Rapid Financing Instrument and/or Rapid
Credit Facility would generally be the appropriate modality for the Fund to support
members with urgent balance of payments (BOP) needs in the context of exceptionally
high uncertainty. However, stronger Fund engagement in a UCT context with a member
facing exceptionally high uncertainty might be deemed appropriate and consistent with
Fund policies in certain cases.
Directors agreed that a case of “exceptionally high uncertainty” is characterized by all of
the factors set out in paragraph 13 of the paper. Directors stressed that the assessment of
whether a case is one of “exceptionally high uncertainty” must be made in a manner that
ensures uniformity of treatment and evenhandedness across the membership.
Directors recognized that it is extremely difficult to design a UCT-quality arrangement in
cases of exceptionally high uncertainty. They supported the approach detailed in the
paper of setting out two fully elaborated scenarios in such cases, covering both a baseline
and a downside scenario, noting the need to demonstrate that a Fund-supported
program could work in both scenarios, and that these scenarios would need to be
sufficiently separated to generate confidence that the program could succeed and solve
the member’s BOP problem and restore the member to medium-term external viability,
notwithstanding the exceptionally high uncertainty about the ongoing shock. Directors
stressed that a member would need to have the capacity and commitment to implement
a UCT arrangement in such circumstances and to provide the necessary data for the Fund
to be able to monitor the program, and that a Staff Monitored Program or Program
Monitoring with Board involvement might first be necessary to establish a track record on
this.
Directors stressed that proceeding with a Fund-supported program in cases of
exceptionally high uncertainty would require careful judgment about whether such a
program would be feasible and credible given its likely risk characteristics, and be
consistent with legal and policy requirements for Fund lending. These requirements
include providing adequate confidence about the ability of the program to solve the
member’s BOP problem and restore the member to medium-term external viability, while
providing adequate safeguards for the repayment of the Fund’s financing. The Board
would need to make this judgement, based on a recommendation from Management and
staff, at the time of approval of the arrangement as well as at subsequent reviews.
Directors expected that, to the extent the exceptionally high uncertainty dissipates, the
program design would revert to the standard Fund approach to lending built just around
the baseline. In the event that the circumstances of exceptionally high uncertainty were to
deteriorate and questions arose about whether the level of confidence had become too
low to clearly and credibly establish a program design to resolve the member’s BOP
problem and/or restore debt sustainability, then Directors would need to determine
whether further financing under the arrangement would become infeasible.
To support the Fund’s ability to approve UCT arrangements in cases of exceptionally high
uncertainty, Directors endorsed the use of a procedural safeguard set out in paragraph 18
of the paper for an initial engagement with Executive Directors. Some Directors called for
a broader engagement than set out in the paper, with a few Directors calling for a formal
Board meeting.
Directors also supported two policy modifications, applying only to cases of exceptionally
high uncertainty, to allow UCT arrangements. First, Directors supported the modified
approach in cases of exceptionally high uncertainty set out in paragraph 25 of the paper
for official bilateral creditors to deliver credible upfront assurances covering their
commitments to help restore debt sustainability where contributions from official bilateral
creditors are needed to restore debt sustainability. Directors also endorsed the proposal
set out in paragraph 26 of the paper, for situations of exceptionally high uncertainty, to
extend the existing use of a capacity-to-repay assurance from official bilateral
creditors/donors to ensure adequate safeguards for the repayment of the Fund’s
financing from an emergency financing context to a UCT program context.
Directors welcomed the paper’s discussion of risks and noted that the proposed policy
changes involve considerable enterprise risks to the Fund while also noting the mitigants
to address these risks identified in the paper. However, they generally agreed that when
considering these risks—including reputational and spillover risks—the benefit of having
the option of supporting members facing exceptionally high uncertainty outweighs the
additional risk of the proposed policy change.
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