The International Monetary Fund proposed creating a $50 billion trust fund to help low-income and vulnerable middle-income countries to build resilience against balance-of-payments shocks and ensure a sustainable recovery.
The Washington-based lender is considering options for channelling some of the $650bn special drawing rights issued in August last year from countries with strong external financial positions to vulnerable countries through a resilience and sustainability trust (RST), the agency said in a blog post on Thursday.
“The RST’s central objective is to provide affordable long-term financing to support countries as they tackle structural challenges,” said Ceyla Pazarbasioglu, co-author of the blog and director of the IMF’s strategy, policy and review (SPR) department.
“RST support aims to address macro-critical longer-term structural challenges that entail significant macroeconomic risks to member countries’ resilience and sustainability, including climate change, pandemic preparedness and digitalisation,” she said.
The IMF approved a record general allocation of $650bn in reserve assets, better known as SDRs, to help member countries, especially emerging and developing nations, cope with the economic fall-out from the coronavirus pandemic.
The allocation was the biggest in the fund’s 77-year history and is meant to help boost global liquidity, the multilateral lender said.
The SDR is the fund’s unit of exchange and is made up of a basket of the world’s five leading currencies – the US dollar, the euro, the yuan, the yen and the UK pound. While the SDR is not money in a classic sense because it cannot be used to buy things, it is an accounting unit for IMF transactions with central banks and a stable asset in the international reserves of member countries. The $650bn allocation is equivalent to about 456bn SDRs.
Of the $650bn allocation, about $275bn will go to emerging markets and developing countries, including low-income nations, the lender said.
“It is crucial not to overlook the longer term challenge of transforming economies to become more resilient to shocks and achieve sustainable and inclusive growth,” said Uma Ramakrishnan, co-author of the blog and deputy director of the IMF’s SPR department.
“The pandemic has taught us that not addressing these long-term challenges in a timely manner can have significant economic consequences, with the potential for future balance-of-payments problems.”
About three quarters of the IMF’s members could be eligible for RST financing, the lender said. This would include all low-income countries, all developing and vulnerable small states, and all middle-income countries with per capita gross national income of about $12,000, it said.
To qualify for RST support, an eligible member would need a package of high-quality policy measures consistent with the fund’s purpose. They would also need a concurrent financing or non-financing IMF-supported programme with appropriate macroeconomic policies to mitigate risks for borrowers and creditors, and sustainable debt and adequate capacity to repay the fund, Ms Pazarbasioglu said.
“Access to RST financing would be determined case by case, based on the strength of reforms and debt sustainability considerations, and is expected to be capped at 150 per cent of IMF quota or SDR1bn, whichever is smaller,” she said.
The RST would allow for more flexible terms, notably on maturities, than the terms that apply to the IMF’s general resources, according to the lender.
Its loans would have much longer maturities than traditional IMF financing. IMF staff proposed a 20-year maturity and a 10-year grace period for RST loans.
A tiered interest structure would differentiate financing terms across country groups, with a high degree of concessionality for lower income members, the IMF said.
“The success of the new trust will depend equally on economically stronger IMF members providing meaningful resources to help countries improve long-term resilience and sustainability; borrowers willing to go the extra mile to achieve the macroeconomic environment and reform framework conducive to improving balance-of-payments stability; and other international financial institutions supporting with their expertise, knowledge and financing where feasible,” Ms Ramakrishnan said.
These actions would also help mobilise private sector investment, she said.