The much-awaited reforms package aimed at bolstering the Fund’s capacity to support Low-Income Countries (LICs) in addressing their balance of payment needs, while restoring the self-sustainability of the Poverty Reduction and Growth Trust (PRGT) has scaled approval process.
The approved policy reforms include: a long-term self-sustained annual lending envelope calibrated at SDR 2.7 billion (about $3.6 billion), more than twice the pre-Covid-19 average. To this end, the membership agreed on a new framework to distribute IMF General Resources to facilitate generation of SDR 5.9 billion (about $8 billion) in additional PRGT subsidy resources.
Detailed in the staff paper “2024 Review of the Poverty Reduction and Growth Trust (PRGT) Facilities and Financing—Reform Proposals,” this would help tailor IMF support to country-specific needs, recognizing the increasing economic heterogeneity of LICs. This includes a new interest rate mechanism that maintains interest-free lending to the poorest countries, while ensuring a sufficient degree of concessionality for others. Access policies will allow for flexibility in calibrating Fund support while safeguards will be strengthened and streamlined.
The IMF significantly scaled-up support to its low-income members in response to the COVID-19 pandemic and subsequent major shocks. The annual lending commitments have risen to an average of SDR 5.5 billion since 2020, compared with about SDR 1.2 billion during the preceding decade. Outstanding PRGT credit has tripled since the pandemic’s onset, while funding costs at the SDR interest rate have risen sharply. As a result, the PRGT faces an acute funding shortfall, with its self-sustained lending capacity projected to decline, absent reforms, to about SDR 1 billion a year by 2027, well below expected demand.
The envelope, which is more than twice the pre-pandemic capacity, is calibrated to ensure that the Fund can use its limited concessional resources to continue providing vital balance of payment support to LICs, while supporting strong economic policies and catalyzing fresh financing from other sources.
The Review includes policy changes that reflect the increasing economic heterogeneity among LICs. A new tiered interest rate mechanism will enhance the targeting of scarce PRGT resources to the poorest LICs, which will continue to benefit from interest-free lending, while better-off LICs will be charged a modest, and still concessional, interest rate. The access norm will be set at 145 percent of quota to help anchor the average size of future arrangements and the overall lending volume. At the same time, annual and cumulative limits for PRGT normal access will remain at 200 and 600 percent of quota, respectively. This will allow for flexibility in calibrating Fund’s support. Safeguards will be strengthened and streamlined to maintain a robust and efficient risk management framework, in light of high lending volumes and risks.
