Sunday, March 29, 2009

IMF Revamps Lending Policies in Response to Financial Crisis

Sources: International Monetary Fund Press Release, IMF Overhauls Lending Framework; Daily Times, The IMF's Lending Overhaul

The IMF has recently taken three major steps to reform its lending policies and make funds more accessible to countries that have been hit hard by the financial crisis. The first major reform is the new Flexible Credit Line (FCL), which has already been dubbed by some as the "EZ loan." To be eligible to receive funds through the FCL, a country must have "very strong fundamentals, policies, and track records of policy implementation," says the IMF. In other words, receiving a loan through the FCL will not be so "easy."

The FCL is different from the IMF's other lending tools in that it permits a country to receive funds without having to commit to specific policy changes. The IMF justifies the FCL's flexibility by noting that only countries that already have strong policy records are eligible to receive funds through the FCL. Moreover, a country's eligibility to use the FCL will be determined on a case by case basis; as such, IMF officials will have quite a bit of discretion in determining whether or not a country is in a position to take out a loan with no strings attached.

The FCL is also considerably more flexible than its predecessor, the Short-Term Liquidity Facility (SLF). For example, while the SLF required that countries repay their loans in 9 months (at the latest), the FCL gives countries 3 1/4 to 5 years to repay their loans. The SLF also limited the amount of money that participating countries could borrow from the IMF. The FCL does not; instead, it provides for a case by case analysis of the amount of money a participating country needs. Finally, the SLF did not allow countries to borrow funds as a precautionary measure. IMF leaders, such as Managing Director Dominique Strauss-Kahn, have explicitly stated that they expect countries to use the FCL as a precautionary tool. The IMF's approval of the FCL will discontinue use of the SLF.

The IMF's second major reform move has been to increase access to its most widely-used lending tool: the stand-by agreement (SBA). The IMF has updated the SBA in two ways: first, it has increased the amount of money that will be available to countries that use this tool, and second, it will allow countries to receive greater amounts of money at the outset of the agreement. The IMF also expects to decrease the number of times it reviews certain countries' policy improvements. If a country has relatively strong policy frameworks to begin with, IMF officials will not review that country's policies as frequently as they would have in the past.

Lastly, the IMF is increasing the total amount of funds available to countries. At this time, IMF officials expect limits on funds that countries may borrow to double. This last change is a response to the growing consensus among international leaders that both advanced and emerging economies increasingly need IMF funds to respond to the financial crisis.

According to Strauss-Kahn, the combination of these three major reform moves will make the IMF a more accessible source of financial support in a time of great need. Specifically, he expects that these reforms will address three major criticisms that the IMF has received since the onset of the crisis: (1) that the IMF conditions its loans on too many factors, (2) that the IMF has not provided pre-crisis financing, and (3) that the IMF's rescue packages have thus far not been large enough. The efficacy of these reforms is sure to be tested as the number of countries affected by the crisis continues to grow.

Discussion Questions:

1- There seem to be significant differences between the IMF's earlier responsive tool to the crisis, the Short-Term Lending Facility, and the new Flexible Credit Line. Do you think that these changes are positive?

2- Given that the Flexible Credit Line is only available to countries with strong policy frameworks, do you think that there will be backlash against the IMF on the part of countries that are struggling both financially and politically? What are the policy reasons against making it easier for countries who are already "strong" in many respects (i.e., in their ability to enact policies) to receive large amounts of money with no strings attached?

3- Should we be concerned that countries' access to the Flexible Credit Line will be determined on a case by case basis, and not according to specific, publicly-available criteria? What factors do you think the IMF will take into account when deciding what countries are eligible to access the FCL and what amounts they may borrow?

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