In my last post, I explained how the IMF has dramatically scaled up its concessional financial assistance to its low-income country members to help them cope with the current global financial crisis.
Today, I want to get beyond how much is being lent, and turn to the how. It’s not enough simply to push out money—vital though that is. We also need to meet the particular needs of the country in question, and these are quite varied. Precisely with this in mind, the IMF has been changing the way it lends to low-income countries. In the jargon, we call this “facilities reform.”
We want to make lending more flexible, and better tailored to the different needs of an increasingly diverse group of low-income countries. It’s a question of horses for courses, as the expression goes.
What was the case beforehand? Well, the centerpiece of the IMF’s concessional financial support for low-income countries for the last decade has been the Poverty Reduction and Growth Facility (PRGF). Established in 1999, the PRGF addressed deep-seated balance of payments constraints—the very constraints that prevented low-income countries, year after year, from importing necessary goods and services, including the investment goods they needed to grow and develop. With these kinds of problems, there was no quick fix. So country programs under the PRGF emphasized deep structural reform, implemented over several years and supported by concessional loans from the Fund—backed by debt relief in certain cases—to create the conditions for strong, sustainable growth.
It’s no secret that IMF lending to low-income countries attracted some criticism over the years. Some people thought the adjustment policies were too harsh, or even misguided. It is true that, for a while, the results were not encouraging. But all the pieces began to fall into place early in this decade. Governments took heart as outcomes improved, and this created a virtuous circle, with better policies leading to still better results. A strong global economy for much of this time helped too. If we look back now at the overall record, the countries’ efforts paid off—PRGF programs have helped them achieve higher growth and lower inflation, supported by higher levels of foreign aid.
Those countries with sustained program engagement—covering at least ten of the past twenty years under the PRGF and its predecessor—saw their economic growth rates roughly double, from an average of 2.7 percent in the 1980s to 5.3 percent over 2000-2007. In contrast, countries with more limited engagement with the IMF recorded more modest gains in growth, from 3.4 percent to 4.4 percent on average. Other economic variables, such as levels of foreign aid, show similar differences.
If the PRGF is working then, why do we need to change it?
In short, because the circumstances are changing, and changing rapidly. Not all countries need the kind of extended engagement the PRGF implies. What this means, of course, is that the IMF needs a wider array of facilities. The greater diversity among the low-income countries should be paralleled by a greater diversity in the structure of facilities. The best way to illustrate this—and to summarize the new options we are offering countries—is to consider some hypothetical examples.
Put yourself, first, in the shoes of a finance minister from a low-income country that still faces entrenched structural problems that will take time to fix. For this minister, having the Fund commit financing for a multi-year program is still likely to be the best option—it will buy time to make the necessary reforms and help mobilize additional donor support. In this case, the finance minister can borrow under the Extended Credit Facility, the successor to the PRGF, which can support country programs of three years or more in duration.
But let’s say the low-income country in question does not need this kind of engagement. Let’s say it has achieved a broadly stable economic environment, and is able to finance itself from other sources (private or official) in normal times. In this case, our finance minister will want to come to the IMF only for short-term assistance when her country hits a bump in the road, such as a fall in the price of a key export, or even a boom-bust cycle caused by policy mistakes. She faces a temporary financing gap that can be eliminated, with corrective policies as needed, within a year or two. This is not unlike the predicament often faced by emerging markets. Not surprisingly, then, the new lending window we are offering to low-income countries in this situation, the Stand-By Credit Facility, mirrors in many respects the most common emerging market window (the Stand-By Facility), except that it is available on concessional terms. And as with its emerging market counterpart, this facility can be used on a precautionary basis for countries with strong policies. These countries might not need the money today, but they have the security blanket of rapid IMF support if needed. This option was not available under the previous structure of concessional facilities—a gap that became glaringly obvious as the global financial crisis began to unfold last fall.
There are other possibilities. What if our finance minister found herself confronted by an urgent financing need and yet did not want a full-scale policy program, or was not in a position to seek it? The country might be coping with a natural disaster, or a temporary external shock. Or it might face political or administrative constraints that would make these kinds of policy adjustments difficult. To help countries in these situations, the new Rapid Credit Facility can deliver financing quickly, in more limited amounts than are available under the two other windows, but with correspondingly lighter conditionality.
Emphasis on poverty reduction
Three new facilities for three different situations. What they have in common is that they all put a heavy emphasis on poverty reduction. Countries need to document how IMF support will help spur growth and reduce poverty. There are also quantitative safeguards to protect social spending.
In addition to providing more financing options, we are also making all our concessional loans cheaper. Given the exceptional circumstances brought about by the global financial crisis, no interest at all will be charged on concessional credit through the end of 2011. And after that, interest rates will be set low enough that concessionality will remain higher than in the past.
With these changes to the range of its facilities, I think the IMF is now better equipped to meet the particular needs of its low-income country membership.
In my next posting, I will discuss how the Fund is helping countries adapt the design of their programs, providing “policy space” to address the fallout from the crisis and streamlining the conditions it applies to borrowing.