The International Monetary fund (IMF) announced on Wednesday that it has revisited its policy on its debt supported programs, or the “debt limits policy”, that would provide countries with more flexibility towards recieving financial assistance while still adequately containing debt vulnerabilities amid the ongoing COVID-19 crisis.
The IMF said in a statement that COVID-19 has elevated the debt vulnerabilities in many countries, especially the low-income countries (LICs) that are witnessing changes in the credit landscape.
The IMF also said that with concessional financing becoming more scarce relative to countries’ investment needs, an increasing number of LICs are beginning to access financing from international financial markets.
The revision included encouraging adequate debt disclosure to the IMF that allows for greater tailoring of debt conditionality for LICs that have been accessing international financial markets on a significant scale, encouraging the broader use of debt conditionality in present value terms - which provides greater flexibility to countries on the mix of borrowing terms, facilitating the utilization of the existing policy for accommodating non-concessional borrowing (subject to safeguards), and clarifying the definition and measurement of concessional debt.
The IMF’s board of executive directors approved this for countries that normally count on concessional financing but have access to international financial markets on a significant scale; using a tailored approach and better alignment of conditionality with the country’s financing mix and program design is needed, according to the statement.
The board also agreed that broadening the use of the IMF's financial support present value ( PV) limits should be expanded for countries that normally rely on concessional financing and do not have significant access to international financial markets, and that are assessed at moderate risk of debt distress, as most members can be expected to have adequate capacity to monitor conditionality on aggregate debt levels in a manner that allows use of debt limits specified in PV terms.
The board agreed that the reform proposals would provide incentives to improve debt management capacity.
In this regard, they encouraged the continued use of structural conditionality when significant weaknesses in debt management capacity are identified in consultation with authorities, in a way consistent with the fund’s guidelines on conditionality.
The board noted that a review of the experience in implementing this new policy would be conducted no later than five years after going into effect, with updates going to the board on the implementation of this policy no later than two years after the date of effectiveness.
In addition, they called for an effective outreach strategy to ensure that the reformed policy is clearly understood by stakeholders.