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Zero Interest Loans For The Poor Until 2014

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By J C Suresh
IDN-InDepth NewsReport

TORONTO (IDN) - As part of a wider strategy to support concessional lending to poorer countries that are combating the effects of the global economic crisis, the International Monetary Fund (IMF) has approved a two-year extension to the zero interest rates charged on loans to low-income countries

Subsequent to further weakening of global growth and low-income countries' declining ability to withstand the crisis, the IMF approved a second extension to the exceptional interest waiver on loans under its Poverty Reduction and Growth Trust (PRGT).

The move, approved by the IMF Executive Board on December 21, 2012 extends the waiver through 2014. In addition, the IMF announced a postponement by one year, until 2014 end, of the next review of PRGT interest rates.

IMF Managing Director Christine Lagarde said: "The Executive Board decision to keep interest rates at zero for all concessional loans for a further two years is testament to the Fund's continued support for low-income countries since the global economic crisis hit in 2009."

According to the Fund, the zero interest-rate extension follows other recent steps by the IMF to bolster lending to poorer countries that include increased resources, higher borrowing limits, and more flexible terms. These moves stem from the major overhaul of the Fund’s support programs for low-income countries in mid-2009, which created a new framework for loans to the world’s poorest nations and initially set zero interest rates on concessional loans through 2011.

"This is the second extension of the zero interest rates. After the first bi-annual review under the PRGT interest rate mechanism in December 2011, the IMF decided that the significant downside risks to the global economic outlook required a one year extension, through 2012, of zero interest rates on concessional facilities," says the Fund.

The IMF stepped up its lending to low-income countries to combat the impact of the ensuing recession after the global financial crisis first erupted in 2008. Initially, poorer countries succeeded in adjusting policies to offset the worst effects of the crisis. But this success was partially reversed in 2011, with many low-income countries having limited fiscal space and running current account deficits that were higher than pre-crisis levels.

Besides, low-income countries face the slow pace of the global recovery and increased volatility in food and fuel prices. A recent review of low-income countries facilities noted a strong and continuous demand for IMF support. Furthermore, says the Fund, empirical evidence shows that over the long term, IMF backed programs help raise growth, reduce poverty, and boost resilience to shocks in low-income economies.

Support package

The PRGT replaced an earlier support program and has been fully operational since January 2010. Lending commitments to low-income countries have been approved under all three PRGT facilities, the Extended Credit Facility (ECF), Standby Credit Facility (SCF), and the Rapid Credit Facility (RCF). These facilities allow for greater access to financing and offer more flexible terms than previously.

The Extended Credit Facility provides sustained engagement over the medium to long term, in case of medium-term balance of payments needs. It also offers more flexibility than before on program extensions, the timing of structural reforms, and formal poverty reduction strategy document requirements.

The Standby Credit Facility, which is similar to the Stand-By Arrangement for middle-income countries, provides flexible support to low-income countries with short-term financing and adjustment needs caused by domestic or external shocks, or policy slippages. It targets countries that do not face protracted balance of payments problems but may need help from time to time. It can also be used on a precautionary basis to provide insurance.

The Rapid Credit Facility provides rapid financial support in a single, up-front payout for low-income countries facing urgent financing needs, and offers successive drawings for countries in post-conflict or other fragile situations. It offers flexible assistance without program-based conditionality when use of the other two facilities is either not necessary (limited nature of need) or not possible (institutional or capacity constraints).

All these facilities allow for significantly higher access to financing and offer more concessional terms than previously. Low-income countries will receive exceptional forgiveness through end-2014 on all interest payments due to the IMF under its concessional lending instruments.

Moreover, for policy advice and signaling to donors, countries can request non-financial assistance under the existing Policy Support Instrument (PSI), which supports low-income countries that have secured macroeconomic stability and thus do not need IMF financial assistance, and can provide accelerated access to the new SCF in case of subsequent financial needs.

According to the Fund, in response to the increasing financial needs of low-income countries during the global financial crisis, IMF concessional lending increased from $1.2 billion in 2008 to $3.8 billion in 2009, and $1.8 billion in 2010 to $1.9 billion in 2011.

Following the onset of the global financial crisis, low-income countries received exceptional relief of all interest payments on outstanding concessional loans due to the IMF through the end of 2011 – effectively, an interest rate of zero on these loans for this period. The period was later extended to end-2012. Now low income countries will receive exceptional relief through end-2014 on all interest payments due to the IMF under its concessional lending instruments.

An IMF report released in September 2012 warned that the sharp drop in PRGT financing capacity after 2014 needed to be addressed for the IMF to maintain its capacity to help low-income countries in the future and support their efforts to promote strong and sustainable growth. The report also noted that IMF support helped low-income countries navigate the crisis and promote longer-term poverty reduction and growth, but that these countries remain exposed to global risks and volatility.

In response, the IMF Board in February 2012 approved the distribution of about $1.1 billion from windfall gold sales profits to its members in order to boost its concessional lending capacity for low-income countries. In September 2012, the Board approved a decision that the remaining gold sales windfall profits of around $2.7 billion be distributed as part of a strategy to ensure the longer-term sustainability of the PRGT. [IDN-InDepthNews – December 30, 2012]

2012 IDN-InDepthNews | Analysis That Matters

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