Factsheet

IMF Lending
October 5, 2010

A core responsibility of the IMF is to provide loans to member countries experiencing actual
or potential balance of payments problems. This financial assistance enables countries to
rebuild their international reserves, stabilize their currencies, continue paying for imports,
and restore conditions for strong economic growth, while undertaking policies to correct
underlying problems. Unlike development banks, the IMF does not lend for specific projects.

When can a country borrow from the IMF?

A member country may request IMF financial assistance if it has a balance of payments need
—that is, if it cannot find sufficient financing on affordable terms to meet its net international
payments while maintaining adequate reserve buffers going forward. An IMF loan provides a
cushion that eases the adjustment policies and reforms that a country must make to correct its
balance of payments problem and restore conditions for strong economic growth.

The changing nature of IMF lending

The volume of loans provided by the IMF has fluctuated significantly over time. The oil
shock of the 1970s and the debt crisis of the 1980s were both followed by sharp increases in
IMF lending. In the 1990s, the transition process in Central and Eastern Europe and the crises
in emerging market economies led to further surges of demand for IMF resources. Deep
crises in Latin America kept demand for IMF resources high in the early 2000s, but these
loans were largely repaid as conditions improved. IMF lending rose again starting in late
2008, as a period of abundant capital flows and low pricing of risk gave way to global
deleveraging in the wake of the financial crisis in advanced economies.

The process of IMF lending

Upon request by a member country, an IMF loan is usually provided under an “arrangement,”
which may, when appropriate, stipulate specific policies and measures a country has agreed
to implement to resolve its balance of payments problem. The economic program underlying
an arrangement is formulated by the country in consultation with the IMF and is presented to
the Fund’s Executive Board in a “Letter of Intent.” Once an arrangement is approved by the
Board, the loan is usually released in phased installments as the program is implemented.

IMF Facilities

Over the years, the IMF has developed various loan instruments, or “facilities,” that are
tailored to address the specific circumstances of its diverse membership. Low-income
countries may borrow on concessional terms through the Extended Credit Facility (ECF), the
Standby Credit Facility (SCF) and the Rapid Credit Facility (RCF) (see IMF Support for
Low-Income Countries). Nonconcessional loans are provided mainly through Stand-By
Arrangements (SBA), the Flexible Credit Line (FCL), and the Extended Fund Facility (which
is useful primarily for longer-term needs). The IMF also provides emergency assistance to
support recovery from natural disasters and conflicts. All non-concessional facilities are
subject to the IMF’s market-related interest rate, known as the “rate of charge,” and large
loans (above certain limits) carry a surcharge. The rate of charge is based on the SDR interest
rate, which is revised weekly to take account of changes in short-term interest rates in major
international money markets. The amount that a country can borrow from the Fund, known as
its access limit, varies depending on the type of loan, but is typically a multiple of the
country’s IMF quota. This limit may be exceeded in exceptional circumstances. The Flexible
Credit Line has no pre-set cap on access.

The new concessional facilities for LICs were established in January 2010 under the
Poverty Reduction and Growth Trust (PRGT) as part of a broader reform to make the Fund’s
financial support more flexible and better tailored to the diverse needs of LICs. Access limits
and norms have been approximately doubled compared to pre-crisis levels. Financing terms
have been made more concessional, and the interest rate is reviewed every two years. All
facilities support country-owned programs aimed at achieving a sustainable macroeconomic
position consistent with strong and durable poverty reduction and growth.

 The Extended Credit Facility (ECF)succeeds the Poverty Reduction and Growth
Facility (PRGF) as the Fund’s main tool for providing medium-term support to LICs
with protracted balance of payments problems. Financing under the ECF currently
carries a zero interest rate, with a grace period of 5½ years, and a final maturity of
10 years.
 The Standby Credit Facility (SCF) provides financial assistance to LICs with short-
term balance of payments needs. The SCF replaces the High-Access Component of
the Exogenous Shocks Facility (ESF), and can be used in a wide range of
circumstances, including on a precautionary basis. Financing under the SCF currently
carries a zero interest rate, with a grace period of 4 years, and a final maturity of
8 years.
 The Rapid Credit Facility (RCF) provides rapid financial assistance with limited
conditionality to LICs facing an urgent balance of payments need. The RCF
streamlines the Fund’s emergency assistance for LICs, and can be used flexibly in a
wide range of circumstances. Financing under the RCF currently carries a zero
interest rate, has a grace period of 5½ years, and a final maturity of 10 years.

Stand-By Arrangements (SBA). The bulk of Fund assistance to middle-income countries is

provided through SBAs. The SBA is designed to help countries address short-term balance of
payments problems. Program targets are designed to address these problems and Fund
disbursements are made conditional on achieving these targets (‘conditionality’). The length
of a SBA is typically 12–24 months, and repayment is due within 3¼-5 years of
disbursement. SBAs may be provided on a precautionary basis—where countries choose not
to draw upon approved amounts but retain the option to do so if conditions deteriorate—both
within the normal access limits and in cases of exceptional access. The SBA provides for
flexibility with respect to phasing, with front-loaded access where appropriate.

Flexible Credit Line (FCL). The FCL is for countries with very strong fundamentals,
policies, and track records of policy implementation and is particularly useful for crisis
prevention purposes. FCL arrangements are approved for countries meeting pre-set
qualification criteria. The length of the FCL is one or two year (with an interim review of
continued qualification after one year) and the repayment period the same as for the SBA.
Access is determined on a case-by-case basis, is not subject to the normal access limits, and is
available in a single up-front disbursement rather than phased. Disbursements under the FCL
are not conditioned on implementation of specific policy understandings as is the case under
the SBA. There is flexibility to either draw on the credit line at the time it is approved or treat
it as precautionary.

Precautionary Credit Line (PCL). The PCL is for countries with sound fundamentals and
policies, and a track record of implementing such policies. While they may face moderate
vulnerabilities that may not meet the FCL qualification standards, they do not require the
same large-scale policy adjustments normally associated with traditional SBAs. The PCL
combines qualification (similar to the FCL) with focused ex-post conditions that aim at
addressing the identified vulnerabilities in the context of semi-annual monitoring. It can have
the length of between one and two years. Access can be front-loaded, with up to 500 percent
of quota made available on approval and up to a total of 1000 percent of quota after
12 months subject to satisfactory progress in reducing vulnerabilities. While there may be no
actual balance of payments need should at the time of approval, the PCL can be drawn upon
should such a need arise unexpectedly.

Extended Fund Facility (EFF). This facility was established in 1974 to help countries
address longer-term balance of payments problems requiring fundamental economic reforms.
Arrangements under the EFF are thus longer than SBAs—usually 3 years. Repayment is due
within 4½–10 years from the date of disbursement.

Emergency assistance. The IMF provides emergency assistance to countries that have
experienced a natural disaster or are emerging from conflict. Emergency loans are subject to
the basic rate of charge, although interest subsidies are available for some countries, subject
to availability. Loans must be repaid within 3¼–5 years.

IMF Conditionality
September 27, 2010

When a country borrows from the IMF, its government agrees to adjust its economic policies
to overcome the problems that led it to seek financial aid from the international community.
These loan conditions also serve as a guarantee that the country will be able to repay the
Fund so that the resources can be made available to other members in need. In recent years,
the IMF has streamlined conditionality in order to promote national ownership of strong and
effective policies.

Designing effective programs

Conditionality in its broad sense embraces both the design of IMF-supported programs—that
is, the underlying macroeconomic and structural policies—and the specific tools used to
monitor progress toward the goals outlined by the country in cooperation with the IMF.
Conditionality is aimed at helping member countries solve balance of payments problems
without resorting to measures that may put national or international prosperity in jeopardy. At
the same time, the measures are meant to safeguard IMF resources by ensuring that the
country’s economy will be healthy enough to repay the loan. All conditionality under an
IMF-supported program must be “macro-critical”—that is, either critical to the achievement
of macroeconomic program goals or necessary for the implementation of specific provisions
under the IMF’s Articles of Agreement.

As part of a wide-ranging reform of its lending practices announced in March 2009, the IMF
introduced a new lending facility (the Flexible Credit Line, FCL) that, for the first time in
Fund history, does not include (ex-post) program conditions, as long as the country meets
rigorous pre-qualification criteria. This is the notion of ex-ante conditionality. With the
exception of the FCL, conditionality in all other Fund facilities involves linking
disbursements to program implementation (known as ex-post conditionality). The
Precautionary Credit Line (PCL), introduced in August 2010, combines elements of both ex-
ante and (light) ex-post conditionality.

In deciding on program-related ex-post conditionality, the IMF is guided by the principle that
the member country has primary responsibility for selecting, designing, and implementing the
policies that will make the program successful. The member country’s policy program is
described in a letter of intent (which often has a memorandum of economic and financial
policies attached to it) that accompanies the country’s request for IMF financing. The
objectives of a program and the types of policies involved depend on country-specific
circumstances. But the overarching goal is always to restore or maintain balance of payments
viability and macroeconomic stability, while setting the stage for sustained, high-quality
growth.

How compliance with program conditions is assessed

Most IMF financing features phased disbursements that link financing to demonstrable policy
actions. This aims to ensure progress in program implementation and to reduce risks to the
IMF. Program reviews provide a framework for the Executive Board to assess periodically
whether the IMF-supported program is broadly on track and whether modifications are
necessary for achieving the program’s objectives. Reviews are used to assess the economic
policies underlying a program from a backward-looking perspective (whether conditions have
been met according to the agreed timetable) and a forward-looking perspective (whether the
program needs to be modified in light of new developments). Reviews normally entail
monitoring whether agreed targets (conditions) have been met and whether the underlying
program objectives are being met. Targets can take different forms:

 Prior actions are measures that a country agrees to take before the IMF’s Executive
Board approves financing or completes a review. Such measures ensure that the
program has the necessary foundation to succeed, or is put back on track following
deviations from agreed policies. Prior actions could include, for example, elimination
of price controls or formal approval of a government budget consistent with the
program’s fiscal framework.
 Quantitativeperformance criteria(QPCs) are specific and measurable conditions
that have to be met to complete a review. QPCstypically refer to macroeconomic
variables under the control of the authorities, such as monetary and credit aggregates,
international reserves, fiscal balances, or external borrowing. For example, a program
might include a minimum level of net international reserves, a maximum level of
central bank net domestic assets, or a maximum level of government borrowing.
 Indicative targets may be established where QPCs cannot be set because of
substantial uncertainty about economic trends (e.g. for the later months of a program).
As uncertainty is reduced, these targets are normally turned into QPCs, with
appropriate modifications. Indicative targets may also be set as supplementary
quantitative targets to assess progress.
 Structural benchmarks are (often non-quantifiable) measures that are critical to
achieve program goals and are intended as clear markers to assess progress in
structural reforms in the context of a program review. These vary across programs but
could, for example, include measures to improve financial sector operations, build up
social safety nets, or strengthen public financial management.

The Executive Board may waive a QPC that is not met if it is satisfied that the program will
be successfully implemented, either because of the minor or temporary nature by which the
QPC was missed or because the country authorities have taken corrective actions. Other
conditions do not require a waiver if they are not met.

Recent changes in conditionality

IMF lending has always involved policy conditions. Until the early 1980s, IMF conditionality
largely focused on macroeconomic policies. Subsequently, the complexity and scope of
structural conditions increased, reflecting in part the IMF’s growing involvement in low-
income and transition countries, where structural problems hampering broader economic
stability and growth were particularly severe.

In recent years, the IMF has become more flexible in the way it engages with countries on
issues related to structural reform of their economies. The guidelines on conditionality were
revised in 2002 following an extensive review. In March 2009, the IMF further modernized
its conditionality framework in the context of a comprehensive reform to strengthen its
capacity to prevent and resolve crises. The new framework ensures that structural conditions
are sufficiently focused and tailored to member countries’ different policies and economic
starting points. In addition to ex-ante conditionality in the FCL (and the PCL) and more
flexible traditional conditionality in other facilities, structural performance criteria are no
longer used in all IMF arrangements (including for low-income countries) and structural
reforms will be monitored in a broad sense within the context of program reviews.

Consistent with the spirit of recent conditionality reforms, structural conditionality in Fund
arrangements approved during the 2008-09 financial crisis has been more streamlined and
focused on core areas of Fund expertise than in the past. Also, as part of the IMF’s efforts to
protect the vulnerable during the crisis, program conditionality in most countries has included
a commitment by the government to strengthen the use of resources for social safety nets.

Consistent with the spirit of recent conditionality reforms, structural conditionality in Stand-
By Arrangements approved during the 2008-09 financial crisis has been more streamlined
and focused on core areas of Fund expertise than in the past. Also, as part of the IMF’s efforts
to protect the vulnerable during the crisis, program conditionality in most countries has
included a commitment by the government to strengthen the use of resources for social safety
nets.