Flexible Credit LinesLessons From the Global Financial Crisis and Future Policy Implications

Ben ZupnickECON5450

Terms of FCLs• “Low cost to get through tough times”

• Relies on “pre-set qualification criteria (ex-ante conditionality) rather than on traditional (ex post) conditionality. In addition, structural reforms will from now on be monitored in the context of program reviews, rather than through the use of structural performance criteria, which will be discontinued in all Fund arrangements, including those with low-income countries.”

• “As with other non-concessional IMF facilities, the cost of drawing under the FCL varies with the scale and duration of lending. The lending rate is tied to the IMF’s market-related interest rate, known as the basic rate of charge, which is itself linked to the Special Drawing Rights (SDR) interest rate”

• “Currently, the effective interest rate under the FCL (or an SBA or a PLL) for access between 500 and 1000 percent of quota—ranges between 1.9–2.5 percent, rising to about 2.3–3.2 percent after 3 years, and higher above 1000 percent of quota1. These interest rates exclude a flat 50 bps service charge, which is applied to all Fund disbursements.”

The criteria used to assess a country’s qualification for an FCL

• A sustainable external position • A capital account position dominated by private flows • A track record of access to international capital markets at favorable terms • A reserve position that is relatively comfortable when the FCL is requested

on a precautionary basis • Sound public finances, including a sustainable public debt position • Low and stable inflation, in the context of a sound monetary and exchange

rate policy framework • The absence of bank solvency problems that pose an immediate threat of

a systemic banking crisis • Effective financial sector supervision • Data integrity and transparency.

IMF FCL Review: Poland• January 5, 2012• Executive Summary

• “Background: Poland’s resilience during the global financial crisis and rapid return to robust growth thereafter attest to its very strong economic fundamentals and policy management. Poland’s performance has been buttressed by the insurance provided by the FCL arrangement.”

• “Outlook: Economic growth is expected to slow in 2012, given the deteriorating outlook for the euro area. Risks are on the downside, mainly reflecting the possibility of spillovers from escalating financial and sovereign stress in the rest of Europe.”

IMF FCL Review: Colombia• April 18, 2012• Executive Summary

• “Background. Colombia’s very strong track record of macroeconomic policy management, underpinned by robust fiscal and monetary policy frameworks, has reduced vulnerabilities in recent years and helped weather the global financial crisis.”

• “Risks. Despite very strong fundamentals, Colombia’s near-term outlook could be adversely affected if the global recovery falters, commodity prices fall, and/or global financial conditions worsen. On the upside, a spike in commodity prices would strengthen the balance of payments and fiscal position, and probably require measures to keep domestic demand growth in check.”

IMF FCL Review: Mexico• December 22, 2011• “The Flexible Credit Line (FCL) arrangement for Mexico, approved a year ago

in a context of heightened risks to the global economic outlook, has played an important role in supporting the authorities’ overall macroeconomic strategy”

• “Fiscal consolidation and supportive monetary policy are poised to be maintained, while the increase in external buffers is being complemented by the FCL arrangement. The floating exchange rate regime will continue to play a key role in buffering external shocks.”

• “Downside risks to Mexico’s near-term outlook arise from unsettled global growth prospects and the turbulence in international financial markets. However, Mexico retains policy space to contain the potential fallout from external shocks, supported by the FCL arrangement”

Date of Expiration Amount Approved Amount Drawn

Type Arrangement Date (SDR Million) (SDR Million)

Colombia FCLC

May 06, 2011 May 05, 2013 3,870.00 0.00

FCLC May 07, 2010 May 05, 2011 2,322.00 0.00

FCLC May 11, 2009 May 06, 2010 6,966.00 0.00

Poland FCLC

Jan 21, 2011 Jan 20, 2013 19,166.00 0.00

FCLC Jul 02, 2010 Jan 20, 2011 13,690.00 0.00

FCLC May 06, 2009 May 05, 2010 13,690.00 0.00

Mexico FCLC

Jan 10, 2011 Jan 09, 2013 47,292.00 0.00

FCLC Mar 25, 2010 Jan 09, 2011 31,528.00 0.00

FCLC Apr 17, 2009 Mar 24, 2010 31,528.00 0.00

Fx Reserves

2004 2005 2006 2007 2008 2009 2010 2011

6.0

8.5

4.7

9.99.9 10.0

12.511.5

8.9

Poland Columbia Mexico

Foriegn Exchange Reserves % of GDP

Expenditure 2003 2004 2005 2006 2007 2008 2009 2010

PolandPublic expenditure on health

% of GDP 4.4 4.3 4.3 4.3 4.6 5.1 5.3

(OECD)Private expenditure on health

% of GDP 1.9 1.9 1.9 1.9 1.9 1.9 2.0

Public social expenditure % of GDP 22.3 21.4 21.0 20.8 19.8

Private social expenditure % of GDP 0.0 0.0 0.0 0.0 0.0

Public pension expenditure

% of GDP 11.9 11.7 11.4 11.5 10.6

Private pension expenditure

% of GDP 0.0 0.0 0.0 0.0 0.0

MexicoPublic expenditure on health

% of GDP 2.6 2.7 2.6 2.6 2.6 2.7 3.1 2.9

(OECD)Private expenditure on health

% of GDP 3.2 3.3 3.2 3.1 3.2 3.1 3.3 3.2

Public social expenditure % of GDP 6.7 6.6 6.9 7.0 7.2 .. .. ..

Private social expenditure % of GDP 0.2 0.2 0.2 0.2 0.2 .. .. ..

Public pension expenditure

% of GDP 1.1 1.1 1.2 1.2 1.4 .. .. ..

Private pension expenditure

% of GDP 0.1 0.1 0.1 0.2 0.3 0.3 0.2 ..

Columbia

(ECLAC) Public social expenditure % of GDP 10.6 10.9 12.8 12.0 12.7 12.6 14.5 13.6

Country

Survey

Inc/Con

Mean Pov. line Headcount

year ($) ($) (%)

i

Colombia 2009 i 264.41 38 9.67

Colombia 2008 i 251.62 38 11.32

Colombia 2005 i 207.25 38 12.71

Colombia 2004 i 174.25 38 18.98

Colombia 2003 i 166.94 38 19.61

Colombia 2002 i 182.93 38 20.26

Colombia 2001 i 172.64 38 19.18

Colombia 2000 i 172.64 38 17.85

Colombia 1999 i 203.61 38 16.18

Colombia 1996 i 222.27 38 13

Colombia 1992 i 239.2 38 6.29

Country

Survey

Inc/Con

Mean Pov. line Headcount

year ($) ($) (%)

i

Mexico 2004 C 303.47 38 1.6

Mexico 2002 C 244.68 38 3.9

Mexico 2000 C 247.55 38 5.53

Mexico 1998 C 200.88 38 8.62

Mexico 1996 C 192.08 38 7.86

Mexico 1994 C 261.95 38 3.56

Mexico 1992 C 250.95 38 4.83

Mexico 1984 C 146.43 38 12.78

Country

Survey

Inc/Con

Mean Pov. line Headcount

year ($) ($) (%)

i

Poland 2009 C 376.49 100 1.74

Poland 2008 C 370.49 100 2.06

Poland 2007 C 346.4 100 2.8

Poland 2006 C 325.83 100 3.96

Poland 2005 C 305.54 100 5.89

Poland 2004 C 340.66 100 5.28

Poland 2002 C 296.84 100 5.8

Poland 2001 C 294.21 100 5.28

Poland 2000 C 298.76 100 4.74

Poland 1999 C 298.36 100 4.67

Poland 1998 C 303.71 100 3.9

Poland 1996 C 138.05 100 41.11

Poland 1992 C 270.93 100 3.23

Effects of FCLs

• Allows a country to keep capital accounts open without being at risk of “capital flight”

• FCL interest rates become “self fulfilling”• Allows country to maintain control of monetary policy

with less Fx reserves, freeing money for other programs

• Provides a source of insurance during emergency situations when markets generally demand a much higher “risk premium”

Scaling-up FCLs

• To Help Countries Face Crisis, IMF Revamps its Lending

• G-20 Reaffirms IMF's Central Role in Combating Crisis

• Gold Reserve Sales

• No Monetary Policy Control Requirement

IMF Programs as a Path to (Financially Sustainable) Development

HIPC PRGF FCL

High Level

of Human Development