IMF Concludes Steps to Maintain its Lending Capacity
The International Monetary Fund, IMF, said it has concluded steps to maintain its lending capacity in the year amidst rising demand for funds support by its member countries.
According to a release, IMF said with the support by creditors for a doubling of the New Arrangements to Borrow (NAB) and a new round of new bilateral borrowing agreements (BBAs), the Fund has maintained its lending capacity at around US$1 trillion for the coming years.
This is of particular importance in the context of increased demand for IMF resources due to the COVID-19 pandemic and ongoing heightened risks.
Since the membership’s endorsement in 2019 of a package on IMF resources and governance reform , the IMF said has worked closely with its creditor members.
According to the IMF, New Arrangements to Borrow (NAB), the second line of defense after quota resources, have been strengthened.
It recalled that in January 2020, the Executive Board approved a NAB reform that included a doubling of the size of the NAB and setting a new NAB period through 2025.
Creditors have since provided the necessary consents and this reform took effect as targeted on January 1, 2021.
Following the effectiveness of the reform, 38 NAB participants contribute an aggregate amount of SDR 361 billion (USD 521 billion) to the Fund’s resource envelope (Table 1).
In addition, work proceeded to maintain access to bilateral borrowing agreements (BBAs) as the third line of defense.
On March 30, 2020, the Executive Board approved a framework for a new round of bilateral borrowing, to succeed agreements in place through end-2020.
Within this framework, a new set of agreements beyond 2020 (2020 BBAs) have been introduced to replace the 2016 BBAs, which expired at end-2020. New bilateral borrowing agreements with 37 creditors for a total of SDR 128 billion (USD 185 billion) have become effective.
Agreements with a few other prospective 2020 BBA creditors are on track to become effective in the period ahead.
The 2020 BBAs have an initial term of three years through end-2023 and may be extended for one further year.
Information on NAB credit amounts and bilateral borrowing agreements is available at respective country pages and through the IMF Financial Data Query Tool at the IMF website.
IMF said the latest amounts will be reflected in the next reporting period.
Meanwhile, IMF Executive Board on October 30, 2020, reviewed the adequacy of the Fund’s precautionary balances.
Precautionary balances, comprising the Fund’s general and special reserves and the Special Contingent Account (SCA-1), are one element of the IMF’s multi-layered framework for managing financial risks.
These balances provide a buffer to protect the Fund against potential losses, resulting from credit, income, and other financial risks.
Thereby, they help protect the value of reserve assets represented by member countries’ positions in the Fund and underpin the exchange of assets through which the Fund provides financial assistance to countries with balance of payments needs.
This review of the adequacy of the Fund’s precautionary balances took place on the standard two-year cycle, although it was delayed by a few months to allow for an assessment of the impact of the COVID-19 pandemic on Fund financial risks.
IMF stated that in conducting the review, its Executive Board applied the rules-based framework agreed in 2010.
The framework includes an indicative range for precautionary balances, linked to a forward-looking measure of total IMF credit that is used to guide decisions on adjusting the target for precautionary balances over time.
The framework also allows for judgement in setting the target, taking into account a broad range of factors affecting the adequacy of precautionary balances.
According to IMF, its Executive Directors welcomed the opportunity to review the adequacy of the Fund’s precautionary balances for the first time since the onset of the global COVID-19 pandemic.
They emphasized the importance of maintaining an adequate level of precautionary balances to mitigate financial risks, safeguard the strength of the Fund’s balance sheet, and protect the value of members’ reserve positions in the Fund.
Directors considered that an adequate level of precautionary balances would thus continue to play an integral part of the Fund’s ability to lend in crises such as the current one.
“Directors agreed that the current rules-based framework adopted in 2010 for assessing the adequacy of precautionary balances remains broadly appropriate.
They emphasized that judgment and Board discretion remain an important part of the framework.
Directors noted that the First Special Contingent Account (SCA-1) has been instrumental in protecting the Fund against potential losses from overdue obligations and ensuring its compliance with international financial reporting standards.
In this regard, a number of Directors looked forward to an opportunity to consider options on the role of the SCA-1.
“Directors noted that Fund credit exposure and related risks have increased significantly since the last review in 2018, with trends compounded by the COVID-19 crisis.
Credit outstanding has nearly doubled, including a surge in emergency financing without conditionality, and commitments under precautionary arrangements are higher than at the last review.
Credit concentration has also increased and scheduled repurchases are larger and more bunched.
In addition, the current target for precautionary balances of SDR 20 billion is likely to fall below the indicative range in this and the next fiscal year.
“In light of these developments, Directors broadly agreed to raise the indicative medium-term target for precautionary balances to SDR 25 billion, while a few Directors would have preferred setting a higher target.
With uncertainty due to the pandemic still very high, Directors underscored the need for close monitoring.
They agreed that the Board should reassess the adequacy of precautionary balances before the next regular review.
“Directors supported keeping the minimum floor for precautionary balances at SDR 15 billion for now and stood ready to revisit the issue, preferably after the FY 2022 review of the Investment Account.
“Directors broadly agreed that there is no need for additional measures to accelerate the pace of reserve accumulation at this stage but urged continued close monitoring.
“While subject to uncertainty, the increased level of Fund credit is expected to generate sufficient lending income for precautionary balances to reach their new target over the medium term.
“A few Directors nevertheless called for consideration of options to speed up reserve accumulation.
“Directors noted that precautionary balances are only one element of the Fund’s multi‑layered risk management framework.
“They emphasized in particular the role of program design, conditionality, lending policies, and the Fund’s preferred creditor status in limiting the Fund’s risk exposure.
“To help inform the assessment of the adequacy and composition of precautionary balances, some Directors noted the benefits of a more holistic approach that takes account of other related Fund policies.
“Directors looked forward to considering options to isolate the impact of pension-related adjustments on the Fund’s precautionary balances to reduce their volatility.”
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IMF Concludes Steps to Maintain its Lending Capacity
