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IMF Enhances Crisis Prevention Toolkit

Press Release No. 10/321
August 30, 2010

The International Monetary Fund (IMF) today 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.

This strengthening of the Fund’s insurance-type instruments is aimed to encourage countries to approach it in a more timely fashion in order to help prevent a crisis and, also, help to 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 FCL was created by the IMF in March 2009 as part of a major overhaul of its lending framework. It is an instrument dedicated to members with very strong fundamentals, policies, and track records of policy implementation, allowing them the flexibility to draw on the line upon approval or to treat it as a precautionary instrument without ongoing policy conditions in either case (see Press Release No. 09/85). 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 percent 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 percent of quota made available on approval of the arrangement and up to a total of 1000 percent 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 (see Press Release No. 09/268).

Work is ongoing to ensure the IMF is able to respond rapidly and effectively in the event of a systemic shock in which chain reactions and spillovers could engender a serious threat to global economic stability. In this context, the Executive Board had a preliminary discussion of several options under a Global Stabilization Mechanism—a framework aimed at enhancing the IMF’s ability to channel liquidity proactively to members that may be affected by a systemic event, in conjunction with bilateral and regional liquidity support arrangements. Discussions of these options will continue in the period ahead.