A proposed US$50-billion trust fund could help low-income and vulnerable middle-income countries build resilience to balance of payments shocks and ensure a sustainable recovery, write CEYLA PAZARBASIOGLU and UMA RAMAKRISHNAN.
Even as countries continue to battle COVID-19, 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. 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. Climate change is another long-term challenge that threatens macroeconomic stability and growth in many countries through natural disasters and disruptions to industries, job markets, and trade flows, among others.
These are global public policy challenges, and it is the shared responsibility of individual countries and the international community to take timely actions. In a previous blog, we explained how the IMF is considering options for channeling some of the US$650 billion SDRs issued in August 2021 from countries with strong external financial positions to vulnerable countries through a Resilience and Sustainability Trust, or RST. The RST’s central objective is to provide affordable long-term financing to support countries as they tackle structural challenges.
As we’ve continued to work toward developing the RST, our current thinking on the key design features—which we outline further below—aim to balance the needs of potential contributors and borrowing countries. With broad support from the membership and international partners, we hope that the Trust can be approved by the IMF Executive Board before the upcoming Spring Meetings and for it to become fully operational before the year’s end.
Key design features
Eligibility
About three quarters of the IMF’s membership could be eligible for RST financing. This would include all low-income countries, all developing and vulnerable small states, and all middle-income countries with per capita GNI below 10 times the 2020 IDA operational cutoff , or about US$12,000.
Qualifying reforms
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 digitalization. That said, not all long-term structural challenges lend themselves to IMF lending. The ability to support reforms in a particular area would depend on the availability of and access to strong diagnostics, the ability to identify policy priorities, and develop the appropriate reform targets. Country ownership and strong commitment of the authorities to do the necessary reforms will be critical to catalyze the much-needed finance from multilateral development banks and the private sector. It is also critical to work in close coordination with other relevant institutions in order to leverage expertise and knowledge. The IMF and World Bank staff have worked closely to develop a coordination framework on RST operations on climate risks, building on earlier experience in supporting countries with structural reforms. Similar frameworks with relevant institutions will be developed in the coming months in this and other reform areas.
Qualification
To qualify for RST support, an eligible member would need: a package of high-quality policy measures consistent with the RST’s purpose; 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.
Financing terms
Like the IMF’s highly concessional and currently zero interest rate Trust for low-income countries (PRGT), the RST would be established under the IMF’s power to administer contributor resources, which allows for more flexible terms, notably on maturities, than the terms that apply to the IMF’s general resources. Consistent with the longer-term nature of balance of payments risks the RST seeks to address, its loans would have much longer maturities than traditional IMF financing. Specifically, staff has proposed a 20-year maturity and a 10-year grace period. A tiered interest structure would differentiate financing terms across country groups, with a high degree of concessionality for lower-income members.
Access to financing
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 SDR 1 billion, whichever is smaller. RST lending would be part of a broader financing strategy members would pursue to address longer-term balance of payments risks, involving a mix of multilateral, bilateral official, and private financing.
Financial architecture
Like the PRGT, the RST’s resources would be mobilized on a voluntary basis from members who wish to channel their SDRs or currencies for the benefit of poorer or vulnerable countries . The financial architecture of the RST is designed to ensure that substantial resources for low-cost long-maturity loans can be mobilized while ensuring the safety and liquidity of contributors’ claims on the Trust based on a multilayered risk management framework that maintains the reserve asset nature of channeled SDRs. To meet the projected demand, the RST would need to mobilize initially around US$50 billion in total resources. A smooth functioning SDR trading market would underpin successful RST operations.
Collaboration essential for success
Mitigating economic risks from long-term structural challenges requires a consistent and deliberate approach, with strong commitment from policymakers to undertake sometimes difficult reforms. And where such commitment is evident, the international community can help with affordable financing, capacity building, and policy advice. The RST will support such a collaborative effort. We will build on our experience of working with the World Bank and other international institutions and regional development banks, complementing their lending to provide the best support to member countries.
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; other international financial institutions supporting with their expertise, knowledge, and financing where feasible. These actions would also help mobilize private sector investment.
Faced with a range of long-term structural challenges that require global action, it has never been more important to support all countries tackle these challenges at an early stage and achieve sustainable growth. The RST could help achieve this goal.
