Understanding IMF Programmes

AE Quarterly June 2018

The Articles of Agreement of the International Monetary Fund (IMF) propose that one of the fundamental objectives of the IMF should be to make the pooled resources of its members temporarily available to other member states in order to address any balance‐of‐payments disequilibria. To ensure the loans that they provide to members are repaid, the IMF also asks borrowers to enter into a programme. These programs usually specify performance criteria for key macroeconomic variables, such as ceilings on the fiscal deficit, the central bank’s lending to government, as well as a floor on net international reserves.

Get to know the jargon

Poverty Reduction and Growth Trust (PRGT). This facility allows low-income countries to borrow on concessional terms. At present, low income countries are defined as those with gross national income per capita of $995 per year or less with loans to these countries attracting an interest rate of zero (Barbados is currently classified as a high-income country with a gross national income per capita of more than $12,055).

Stand-By Arrangements (SBAs). This is the IMF’s most popular lending facility and is aimed at member countries in need of balance of payments support. This facility is normally for 12-36 months and over the life of the programme up to 435 percent of a member’s quota. In this case of Barbados this would work out to be about US$578 million. The minimum interest rate on these loans is the SDR rate plus a margin of 100 basis points, or approximately 1.980 at present.

Extended Fund Facility (EFF). This facility is aimed at countries with serious structural weaknesses and require more time to address than is typically under the SBA facilities. EFF are usually for 4.5-10 years in duration, with similar borrowing limits as the SBA. The interest rate starts at the SDR interest rate plus 100 basis points, similar to the SBA rate mentioned above.

Flexible Credit Line (FCL). This is facility that was designed to mitigate crises in countries with relatively strong policy frameworks but might have been affected by some shock.     The interest rate is similar to that charged under the SBA and EFF facilities but there is currently no cap in relation to how much can be borrowed.

Rapid Financing Instrument (RFI). This fund provides rapid financing assistance to countries in need of urgent balance of payments support. It can help countries that have been affected by a natural disaster or a commodity price shock and therefore in need of some support for its balance of payments.     Access limits are relatively small, 60 percent of Special Drawing Rights in the fund (in the case of Barbados about $7.59 million.

Programs supported by the IMF consist of six broadly defined phases: inception, blueprint, negotiation, approval, monitoring, and completion. The monitoring phase is the longest and most important phase, because this is the period during which the borrowing member gets access to most of the funds and the IMF staff ensure that the borrowing member country implements policies necessary to meet the objectives of the program.

An extensive amount of research has attempted to examine the impact of IMF‐supported programs on key macroeconomic variables. These surveys usually find that IMF‐supported programs tend to lead to an improvement in the overall balance of payments but have no statistically significant impact on inflation and real economic growth. Many of these studies do not take into account the effects of compliance of the countries in the IMF programs. When compliance is taken into account (measured by sustained access to Fund credit), IMF‐supported programs lead to improvements in the current account, real output, and a reduction in the inflation rate.

Programs supported by the IMF can also have an impact on the borrowing country through enhancing economic agents’ confidence in government policies and/or the sustainability of these policies. A rise in the credibility of announced policies should reduce the output cost of lowering inflation. To test the credibility effect of IMF‐supported programs, previous researchers have attempted to evaluate whether, by reassuring investors, IMF financing can help the country to attract other funds. The evidence on the subject to date has been mixed. Some authors report that IMF financing is positively associated with increased lending from other public sources and enhances the willingness of countries to participate in external debt rescheduling programs and attracts private capital flows. The existence of a program also lowers the expected probability of loan defaults and, therefore, the average spread over the London Interbank Offered Rate.

About the author(s)

Winston Moore is the Chief Economic Consultant at Antilles Economics.

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