Review of the Flexible Credit Line, The Short Term Liquidity Line and the Precautionary and Liquidity Line, and Proposals for Reform
Review of the Flexible Credit Line, The Short Term Liquidity Line and the Precautionary and Liquidity Line, and Proposals for Reform

Author: International Monetary

Publisher: International Monetary Fund

Published: 2023-10-06

Total Pages: 148

ISBN-13:

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The Fund’s precautionary toolkit rests on the simple proposition that facilitating crisis prevention is far less costly than crisis resolution. Its value increases with systemic risk. Serial shocks to the global trading and financial systems pose significant and persistent headwinds for well-integrated emerging markets. An adequately funded global financial safety net (GFSN) with a suite of precautionary tools allows qualifying members to respond to balance of payments (BoP) shocks, reducing the incidence of crises and limiting contagion. The Fund is the only layer of the GFSN available to all members; other layers vary in their availability and externalities. In this context, the overarching objective of this review of the Flexible Credit Line (FCL), Short-term Liquidity Line (SLL), and Precautionary and Liquidity Line (PLL) is to ensure that the precautionary facilities toolkit (henceforth “the toolkit”) is fit for purpose for the challenges ahead.

Adequacy of the Global Financial Safety Net—Review of the Flexible Credit Line and Precautionary and Liquidity Line, and Proposals for Toolkit Reform—Revised Proposals
Adequacy of the Global Financial Safety Net—Review of the Flexible Credit Line and Precautionary and Liquidity Line, and Proposals for Toolkit Reform—Revised Proposals

Author: International Monetary Fund. Strategy, Policy, & Review Department

Publisher: International Monetary Fund

Published: 2017-12-19

Total Pages: 29

ISBN-13: 1498346154

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in the Fund’s work stream on the Adequacy of the Global Financial Safety Net (GFSN). The paper follows the Executive Board’s discussion of the Adequacy of the Global Financial Safety Net—Review of the Flexible Credit Line and Precautionary and Liquidity Line, and Proposals for Toolkit Reform on June 30, 2017 (the "June paper"),1 and presents revised reform proposals in light of Directors’ views. In the absence of sufficient Executive Board support for a new liquidity facility, the paper proposes to retain the Precautionary and Liquidity Line (PLL). It also proposes to introduce a Time-Based Commitment Fee (TBCF) in light of many Directors’ support for this feature. 2. This work is part of the Fund’s broader work stream to strengthen the GFSN . As such, it complements the new non-financing Policy Coordination Instrument and operational principles and framework for future Fund engagement with Regional Financing Arrangements.2 3. The paper is organized as follows. Section II lays out the revised set of reform proposals. Section III sets forth issues for discussion, and proposes decisions to (i) complete the review of the Flexible Credit Line (FCL) and the PLL; and (ii) introduce a TBCF. The paper also includes an Annex that describes a planned revision to the presentation of the Fund’s Forward Commitment Capacity (FCC) to provide a breakdown between precautionary and other Fund commitments.

Adequacy of the Global Financial Safety Net—Review of the Flexible Credit Line and Precautionary and Liquidity Line, and Proposals for Toolkit Reform
Adequacy of the Global Financial Safety Net—Review of the Flexible Credit Line and Precautionary and Liquidity Line, and Proposals for Toolkit Reform

Author: International Monetary Fund. Strategy, Policy, & Review Department

Publisher: International Monetary Fund

Published: 2017-12-19

Total Pages: 87

ISBN-13: 1498346138

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protracted global uncertainty combined with frequent episodes of capital flow volatility have intensified demand for liquidity support. In response to calls from the IMFC and the G20, the Fund has identified gaps in the global financial safety net (GFSN) and the Fund’s lending toolkit for crisis prevention, including insufficient coverage against liquidity pressures resulting from volatile capital flows. The proposals in this paper draw on the previous Fund work on the adequacy of the GFSN, the review of the Fund’s current toolkit for crisis prevention, and extensive consultations with the membership. The review of the FCL concludes that the FCL has been effective in providing precautionary support against external tail risks. Successor FCL arrangements and associated access levels have been in line with the assessment of external risks and potential balance of payments needs. However, there is scope to strengthen the transparency and predictability of the qualification framework by adding indicator-based thresholds to complement and inform judgment. To enhance crisis resilience while improving the Fund’s toolkit coherence and resource use, the paper proposes three complementary reforms: The establishment of a Short-term Liquidity Swap to provide renewable and reliable liquidity support against potential short-term moderate volatility of capital flows. The proposed instrument is for members with very strong fundamentals and economic policies, and tailored to improve reliability and appeal to users. The use of a core set of indicators with thresholds to guide judgment in FCL qualification. This will improve predictability and transparency while keeping the standards unchanged. The elimination of the PLL to maintain a streamlined and coherent toolkit, given the low use of the PLL, likely reflecting issues of tiering with the FCL. The paper also discusses possible reforms of the current commitment fee policy to promote a more balanced use of Fund resources. Possible options include increasing the commitment fee at high access levels or introducing a new time-based commitment fee.

IMF COVID-19 Response—A New Short-Term Liquidity Line to Enhance The Adequacy Of The Global Financial Safety Net
IMF COVID-19 Response—A New Short-Term Liquidity Line to Enhance The Adequacy Of The Global Financial Safety Net

Author: International Monetary Fund

Publisher: International Monetary Fund

Published: 2020-04-22

Total Pages: 64

ISBN-13: 1513541706

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The COVID-19 pandemic has created severe disruption in the global financial system, with many emerging market and developing countries (EMDCs) facing liquidity shortages. In the context of intensified demand for liquidity and heightened global uncertainty, staff has revisited the 2017 proposal for a new facility to provide liquidity support to the Fund’s membership. This paper proposes the establishment of a new Short-term Liquidity Line (SLL) as a special facility in the General Resources Account (GRA), based on the key features of the 2017 blueprint.

Precautionary and Liquidity Line - Operational Guidance Note
Precautionary and Liquidity Line - Operational Guidance Note

Author: International Monetary Fund. Strategy, Policy, & Review Department

Publisher: International Monetary Fund

Published: 2018-08-06

Total Pages: 51

ISBN-13: 1498309437

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"This note provides general guidance on the use of the Precautionary and Liquidity Line (PLL). After an overview of the instrument, explaining its specific nature, the operational issues are grouped into five areas: • an outline of the process and specific steps that need to be followed if a member expresses interest in an arrangement; • guidance on access, phasing, and purchases; • guidance on determining qualification of a member and appropriate ex-post conditionality; and • a guide to the semi-annual review process. The note is an aid to the implementation of the policy and its underlying principles. If there is any instance in which a provision of the guidance note or its implementation conflicts with Board policy, Board policy prevails. It will be revised as needed, for example following relevant policy reviews."

Adequacy of the Global Financial Safety Net—Considerations for Fund Toolkit Reform
Adequacy of the Global Financial Safety Net—Considerations for Fund Toolkit Reform

Author: International Monetary Fund. Strategy, Policy, & Review Department

Publisher: International Monetary Fund

Published: 2017-12-19

Total Pages: 42

ISBN-13: 1498346162

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liquidity in the face of increased vulnerabilities calls for enhancing the liquidity support provided through the global financial safety net (GFSN). The global economy is experiencing a period of protracted uncertainty, marked by frequent episodes of volatility. Demand for liquidity has intensified, in particular from emerging markets, which are experiencing a build-up of vulnerabilities and the depletion of their fiscal buffers. The enhanced GFSN meets only partially this higher demand for liquidity. The IMFC and G20 have called on the Fund to further strengthen the safety net. The uneven use of the Fund’s toolkit for crisis prevention suggests the need to reconsider its design. Despite a major overhaul of the Fund’s lending instruments available for precautionary financing, only a modest number of countries have used them. In particular, the lack of access to a liquidity backstop for members with strong policies—similar to the standing bilateral swap arrangements (BSAs) among central banks—limits the availability of Fund support over the whole duration of the shock during protracted periods of global uncertainty. Moreover, the need to resort to Fund financing still carries a high political cost (stigma) for some members. To enhance further the Fund’s toolkit for crisis prevention, consideration could be given to revisiting the existing toolkit and introducing new instruments. The toolkit could thus be enhanced by: establishing a new facility for precautionary financing that would provide a "standing" liquidity backstop to members with strong fundamentals and policies for use when hit by liquidity shocks; and adjusting the existing toolkit to maintain cohesion. Any change to the Fund toolkit would need to take into account the tradeoffs between reducing stigma and containing moral hazard, while simultaneously safeguarding Fund resources. A Fund policy monitoring instrument could improve the cohesion of the global safety net. As the GFSN has expanded and become more multi-layered, there is a need to improve cooperation across the different layers to unlock financing and signal commitment to reforms. Creating a policy monitoring instrument that is available to all Fund members could help in this regard. Next steps . In light of Directors’ views on these points, staff could come back with subsequent papers that lay out specific and detailed proposals for reforming the lending toolkit. While these papers focus on the GRA lending toolkit, a separate forthcoming paper will assess some aspects of the concessional lending toolkit.

Selected Decisions and Selected Documents of the International Monetary Fund, Forty First Issue Supplement
Selected Decisions and Selected Documents of the International Monetary Fund, Forty First Issue Supplement

Author: International Monetary Fund. Legal Dept.

Publisher: International Monetary Fund

Published: 2021-02-08

Total Pages: 907

ISBN-13: 1513557521

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This volume is the Forty-First Issue of Selected Decisions and Selected Documents of the IMF. It includes decisions, interpretations, and resolutions of the Executive Board and the Board of Governors of the IMF, as well as selected documents, to which frequent reference is made in the current activities of the IMF. In addition, it includes certain documents relating to the IMF, the United Nations, and other international organizations. As with other recent issues, the number of decisions in force continues to increase, with the decision format tending to be longer given the use of summings up in lieu of formal decisions. Accordingly, it has become necessary to delete certain decisions that were included in earlier issues, that is, those that only completed or called for reviews of decisions, those that lapsed, and those that were superseded by more recent decisions. Wherever reference is made in these decisions and documents to a provision of the IMF’s Articles of Agreement or Rules and Regulations that has subsequently been renumbered by, or because of, the Second Amendment of the Fund’s Articles of Agreement (effective April 1, 1978), the corresponding provision currently in effect is cited in a footnote.

Review of the Adequacy of the Fund’s Precautionary Balances
Review of the Adequacy of the Fund’s Precautionary Balances

Author: International Monetary Fund. Finance Dept.

Publisher: International Monetary Fund

Published: 2024-04-04

Total Pages: 68

ISBN-13:

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On March 20, 2024, the IMF’s Executive Board reviewed the adequacy of the Fund’s precautionary balances. The review took place somewhat ahead of the standard two-year cycle, in view of the imminent attainment of the current indicative medium-term indicative target of SDR 25 billion for the first time. Precautionary balances comprise the Fund’s general and special reserves. They are a key element of the IMF’s multi-layered framework for managing financial risks. Precautionary balances provide a buffer to protect the Fund against potential losses, resulting from credit, income, and other financial risks. The review was based on the assessment framework established in 2010, which uses an indicative range for precautionary balances, linked to a forward-looking measure of total IMF non-concessional credit, to guide decisions on adjusting the medium-term target over time. While financial risks remain high, they are broadly unchanged from the last review, taking into account the further accumulation of reserves and strengthening of some risk mitigants. Against this background, Executive Directors broadly supported staff’s proposal to retain the current medium-term target of SDR 25 billion and increase the minimum floor from SDR 15 billion to SDR 20 billion. The Board also supported maintaining the biennial review cycle, with earlier reviews if warranted by developments that could materially affect the adequacy of precautionary balances.