Caribbean Community (CARICOM) countries could benefit from a decision by the International Monetary Fund (IMF) Monday to approve a set of reforms to its concessional lending facilities and an associated funding strategy to preserve the financial institution’s ability to provide adequate support to low-income countries (LDCs) over the long term.
Caribbean countries have in the past complained of the policies by which concessional financial assistance might be extended to help their economies, proposing for example, that consideration be given to having credit extended to countries which have already invested in green technology.
The Washington-based financial institution said the reforms follow the “2024 Review of the Poverty Reduction and Growth Trust (PRGT) Facilities and Financing—Reform Proposals,” even as it has significantly scaled up support to its low-income members in response to the COVID-19 pandemic and subsequent major shocks.
It said the annual lending commitments have risen to an average of SDR 5.5 billion (One SDR=US$1.33 cents) since 2020, compared with about SDR 1.2 billion during the preceding decade.
The IMF said that outstanding PRGT credit has tripled since the pandemic’s onset, while funding costs at the SDR interest rate have risen sharply. As a result, the PRGT faces an acute funding shortfall, with its self-sustained lending capacity projected to decline, absent reforms, to about one billion SDR a year by 2027, well below expected demand.
The reforms approved by the IMF’s Executive Board aim at maintaining adequate financial support to LICs while restoring the self-sustainability of the PRGT.
The Executive Board endorsed a long-term annual lending envelope of SDR 2.7 billion ($3.6 billion) and approved a package of policy reforms and resource mobilization to support that lending capacity.
It said the envelope, which is more than twice the pre-pandemic capacity, is calibrated to ensure that the Fund can use its limited concessional resources to continue providing vital balance of payment support to LICs while supporting strong economic policies and catalyzing fresh financing from other sources.
The review includes policy changes that reflect the increasing economic heterogeneity among LICs. A new tiered interest rate mechanism will enhance the targeting of scarce PRGT resources to the poorest LICs, which will continue to benefit from interest-free lending, while better-off LICs will be charged a modest, and still concessional, interest rate.
The access norm will be set at 145 percent of the quota to help anchor the average size of future arrangements and the overall lending volume. At the same time, annual and cumulative limits for PRGT normal access will remain at 200 and 600 percent of the quota, respectively. This will allow for flexibility in calibrating the Fund’s support. Safeguards will be strengthened and streamlined to maintain a robust and efficient risk management framework, in light of high lending volumes and risks.
The IMF said after a successful bilateral fundraising, and in the context of a robust financial outlook for the Fund, the membership reached a consensus on a framework to deploy IMF internal resources to facilitate the generation of PRGT subsidy resources.
Specifically, SDR 5.9 billion (about US$8 billion), in 2025 present value terms, is expected to be generated through a framework to distribute GRA net income and/or reserves over the next five years.
This would come on top of additional bilateral subsidy contributions, the subsidy savings from the new interest rate mechanism, and financing from a proposed further five-year suspension of PRGT administrative expenses reimbursement to the GRA, the IMF said.
The IMF directors agreed that the next general review of the Fund’s facilities for LDCs will take place on the standard five-year cycle.
WASHINGTON, Oct 21, CMC
CMC/2024