The Zero-Conditionality IMF Loan

♠ Posted by Emmanuel in , at 10/30/2008 01:06:00 PM
The IMF has just come out with a new lending facility designed for countries that have a "strong track record" but are nonetheless experiencing balance-of-payments difficulties. Again, the IMF is presenting itself as adjusting with the times with this facility by hastening disbursement and removing conditionalities altogether for country borrowers that can avail of the so-called Short-Term Liquidity Facility (SLF). What remains to be seen is just how many countries qualify for this new facility to make it a usable one in these uncertain times. From the IMF website:
The IMF said it will create a new short-term lending facility to channel funds quickly to emerging markets that have a strong track record, but that need rapid help during the current financial crisis to get them through temporary liquidity problems.

In a press announcement, the IMF said the Short-Term Liquidity Facility (SLF) is designed to help emerging market countries with a track record of sound policies address the fallout from the crisis. The new facility, approved by the IMF's Executive Board on October 28, comes with no conditions attached once a loan has been approved and offers large upfront financing to help countries restore confidence and combat financial contagion.

"Exceptional times call for an exceptional response," said IMF Managing Director Dominique Strauss-Kahn. "The Fund is responding quickly and flexibly to requests for financing. We are offering some countries substantial resources, with conditions based only on measures absolutely necessary to get past the crisis and to restore a viable external position," he said.

Until recently, emerging markets were one of the few bright spots left in a world economy hit by massive deleveraging, failing banks, and corporate profit warnings. But now, the crisis is spreading beyond the advanced economies where it originated, with emerging markets all over the world suffering from the squeeze in global financial markets. The IMF has already reached outline financing agreements with Iceland, Hungary, and Ukraine, and is in advanced talks with several other countries.

The SLF will allow the IMF to help its members at a critical time. "Even countries that have excellent track records of implementing strong macroeconomic policies have been caught up in the global financial market crisis. They need support, and the IMF is ready to give it," Strauss-Kahn said.

"The SLF will support the authorities' efforts to reduce the impact of the crisis. Approval of a request for support under the SLF will help members fortify defenses against temporary capital account outflows, boost confidence and provide needed policy space," he said.

Despite the current surge in demand for IMF resources, there is a growing recognition that the Fund's traditional facilities may not be the optimal means of addressing short-term balance of payments pressures in every case.

"While existing Fund loan facilities offer flexibility, they are fundamentally used for countries that require both financing and policy adjustment [read: "structural adjustment"], and not for countries that despite strong initial macroeconomic positions and policies are facing short-term liquidity pressures. This facility addresses that gap in the Fund's toolkit of financial support," Strauss-Kahn said.

IMF First Deputy Managing Director John Lipsky told an October 29 news conference in Washington that the SLF "is designed to be easy to use and very rapid for those countries where use is appropriate."

The unique features of the SLF will address the needs of emerging market countries more directly than would a traditional IMF stand-by arrangement:

• Purpose. Provide large, upfront, quick-disbursing, short-term financing to help countries with strong policies and a good track record address temporary liquidity problems in capital markets.
• Eligibility. Countries with a good track record of sound policies, access to capital markets and sustainable debt burdens may qualify (the IMF's standard debt sustainability analysis should indicate a high probability that both public and private debt will remain sustainable). Policies should have been assessed very positively by the IMF's most recent country assessment.
• Conditions. Financing is made available without the standard phasing and loan conditions of more traditional IMF arrangements. However, borrowers are expected to certify that they are committed to maintaining strong macroeconomic policies.
• Size of loan. Disbursement of IMF resources can be up to 500 percent of quota, with a three month maturity. Eligible countries are allowed to draw up to three times during a 12-month period.