| Welcome to Global Village Space

Thursday, February 15, 2024

IMF approves reforms to help poor countries in economic recovery

The reforms will increase the normal limits on access to concessional financing by 45 percent, coupled with the elimination of hard limits on access for the poorest countries. This would increase the flexibility of funds disbursement according to the need of the related countries.

International Monetary Fund (IMF) on 14th July approved policy reforms and funding package to aid in the recovery of Low-Income Countries (LICs) from the ongoing Covid 19 pandemic.

According to the press release by the fund on 22nd July, the reforms approved by the IMF’s Executive Board seek to ensure that the Fund can flexibly support Low-Income Countries (LICs’) financing needs during the pandemic and the recovery while continuing to provide concessional loans at zero interest rates.

However, there were some changes made, in the fact that the funds are going to be long term, rather than emergency financing facilities,  and they would feature a 45 percent increase in the limits of concessional financing, coupled with the elimination of hard limits on access for the poorest countries.

Document states, “these higher access limits will facilitate the provision of more concessional support to LICs with strong policies and large balance of payments needs.”

Additionally, the Executive Board approved a two-stage funding strategy to cover the cost of pandemic-related concessional lending and support the sustainability of the Poverty Reduction and Growth Trust (PRGT).

The first stage of the strategy aims to secure Special Drawing Rights (SDR) $2.8 billion in subsidy resources (to support zero interest rates), and an additional SDR $12.6 billion in loan resources which could be facilitated by the “channeling” of SDRs.

This reform aims to increase the flexibility in the availability of funds in the medium term so that the needs of the poor countries are fulfilled.

It is worth mentioning that the fund’s lending to LICs increased dramatically in 2020—an eightfold increase from average lending levels in 2017–2019—and is projected to continue at elevated levels for several years, as low-income countries seek financial assistance to help them respond to and recover from the pandemic.

Read More: Reconstructing Iraq: Role of IMF and World Bank

However, now on the bulk of financial assistance is expected to be provided through multi-year lending arrangements—a shift from 2020, when most assistance was provided through the Fund’s emergency financing facilities.

The press release mentioned that to support concessional financing to LICs through the PRGT, grant resources are needed to cover the costs associated with providing zero-interest lending.

In 2019, the PRGT was assessed to have sufficient resources to finance interest subsidies on the Fund’s concessional lending on a self-sustaining basis over the long term.

However, the document read, the volume of pandemic-linked lending—already provided or expected to be provided in the next few years—far exceeds what had been anticipated or previously recorded, creating a sizable shortfall in the necessary resources.

The directors conceded that the LICs had been hit hard during the pandemic and support is needed to recover from the economic crunch and achieve sustainable inclusive growth.

According to the press release, the directors were in broad agreement that the proposed reform package would better position the Fund to respond to the needs of LICs. They supported the proposed increases in limits on normal access to the Poverty Reduction and Growth Trust (PRGT) resources and the removal of the limits on exceptional access for the poorest countries.

Some, however, expressed concern about entirely removing the hard caps on PRGT exceptional access for poorer LICs.

Given the substantial uncertainties around potential demand for concessional resources and the timing and scale of donor contributions, Directors underscored the need to closely monitor the evolution of PRGT finances and supported the staff proposal for annual reviews of the adequacy of PRGT resources.

In June 2020, Pakistan received $1 billion loans to prop up its struggling economy that has taken a hit from global coronavirus restrictions, the central bank announced.

Read More: We stand ready to continue to support Pakistan, says IMF

The Asian Development Bank (ADB), and the World Bank each lent $500 million to cash-strapped Pakistan.