The International Monetary Fund (IMF) expanded and enhanced its lending tools to help contain the occurrence of financial crises. As part of the efforts to enhance the institution’s crisis-prevention toolkit, the Fund’s Executive Board decided to increase the duration and credit available under the existing Flexible Credit Line (FCL) and to establish a new Precautionary Credit Line (PCL) for members with sound policies who nevertheless may not meet the FCL’s high qualification requirements.
“These decisions expand and reinforce the IMF’s crisis-prevention toolkit and mark an important step in our ongoing work with our membership to strengthen the global financial safety net. The enhanced Flexible Credit Line and new Precautionary Credit Line will enable the Fund to help its members protect themselves against excessive market volatility,” said IMF Managing Director Dominique Strauss-Kahn.
The strengthening of the Fund’s insurance-type instruments is aimed at encouraging countries to approach it in a more timely fashion in order to help prevent a crisis and, also at helping protect them during a systemic crisis. Mr. Strauss-Kahn added that “the revamped financing toolkit rewards countries that implement strong policies. We expect that the availability of these credit lines to a broader spectrum of countries will contribute to a more stable international monetary system.”
These reforms come as the G20 has made the strengthening of the global financial safety net an agenda item for its next meeting in Seoul, Korea in November 2010. The government of Korea has taken a leading role in advancing this issue.
The enhancements approved today by the Executive Board include:
• Doubling the duration of the credit line (FCL arrangements can now be approved for either one year or two years, with an interim review of qualification after one year, whereas they were previously either for six months, or one year with an interim review after six months);
• Removing the implicit cap on access of 1000 per cent of a member’s IMF quota, with access decisions based on individual country financing needs; and
• Strengthening procedures by requiring early Executive Board involvement in assessing the contemplated level of access and the impact of such access on the IMF’s liquidity position.
The new PCL is available to a wider group of members than those that qualify for the FCL. In practice, qualification is assessed in five broad areas, namely: (i) external position and market access, (ii) fiscal policy, (iii) monetary policy, (iv) financial sector soundness and supervision, and (v) data adequacy. While requiring strong performance in most of these areas, the PCL permits access to precautionary resources to members that may still have moderate vulnerabilities in one or two of these dimensions. Features of the PCL include:
• Streamlined ex post conditions designed to reduce any economic vulnerabilities identified in the qualification process, with progress monitored through semi-annual program reviews.
• Frontloaded access with up to 500 per cent of quota made available on approval of the arrangement and up to a total of 1000 per cent of quota after 12 months.
· Besides these reforms, the Fund has recently made other improvements to its lending toolkit, including a revamp of its facilities for low-income countries in July 2009.
© International Monetary Fund
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