IMF Executive Board adopts decision to enhance the financial safety net for developing countries hit by large natural disasters
On May 5, 2017, the Executive Board of the International Monetary Fund (IMF) adopted proposals to enhance access of countries hit by large natural disasters to IMF financial support. These proposals, and the case for adopting them, are contained in the staff paper “ Large Natural Disasters—Enhancing the Financial Safety Net for Developing Countries.”
Background
The IMF’s Rapid Credit Facility (RCF) and Rapid Financing Instrument (RFI) are available to provide financing to Fund members facing urgent balance of payment needs, including those stemming from natural disasters. The RCF and RFI are designed to play a catalytic role in mobilizing other external financing. Since 2000, the RCF, RFI, and their predecessor instruments have provided financing following 27 natural disaster events.
As discussed in an earlier staff paper, “ Small States’ Resilience to Natural Disasters and Climate Change—Role for the IMF ”, large natural disasters can result in immediate balance of payments needs that are large in relation to access limits under RCF and RFI. In a follow-up paper discussed by the Board on May 5, 2017 the Executive Board of the IMF endorsed a proposal to increase the annual access limit under the RCF and RFI from 37.5 to 60 percent of a member’s quota in the Fund. This would strengthen the Fund’s financial safety net for countries experiencing urgent balance of payments needs arising from large natural disasters, while helping to catalyze other sources of financing to meet such financing needs. A member would qualify for the higher access limit under the RCF and RFI where the urgent balance of payments needs stem from a natural disaster that occasions damages of at least 20 percent of the member’s GDP.
Executive Board Assessment
Executive Directors welcomed the proposals for enhancing the financial safety net for countries hit by natural disasters. They recognized that, while these countries can avail themselves of the Rapid Credit Facility (RCF) and Rapid Financing Instrument (RFI), annual access limits under these instruments may be low relative to the size of balance of payment needs caused by large disasters, to which small states are most vulnerable. They noted that, when access limits under the RCF and RFI were halved with the doubling of Fund quotas under the 14th General Review of Quotas, members that received the lowest quota increases were at a disadvantage and have not benefitted fully from the previous reforms that were intended to address an erosion of access limits.
Accordingly, Directors supported the proposed establishment of new windows under the RCF and RFI to provide annual access of up to 60 percent of quota for countries experiencing urgent balance of payments needs arising from large natural disasters. They noted that this will better help meet the immediate needs of these members and enhance the Fund’s catalytic role in mobilizing other external financing. Directors agreed that, pending next year’s comprehensive review of the Fund’s facilities for low-income countries, the current cumulative access limits for both the RCF and the RFI should remain unchanged at 75 percent of quota. A few Directors saw a case for considering how to further enhance the financial safety net for fragile states.
Directors agreed that qualification for higher access under the large natural disaster windows within the RCF and RFI should be conditional, inter alia, on meeting a disaster damage threshold of 20 percent of the member’s GDP. They considered that this threshold strikes the appropriate balance between providing emergency financing to disaster-hit countries on the one hand, and safeguarding Fund resources and discouraging facility shopping on the other hand. Directors also supported the staff’s approach to estimating disaster damage, drawing on a range of third-party information and collaborating closely with other organizations, while ensuring that the Fund’s response is timely and consistent with its mandate.
Directors welcomed the staff’s assessment that the reform proposals would be consistent with the self-sustainability of the Poverty Reduction and Growth Trust (PRGT), and that demand for PRGT resources associated with the proposed damage threshold would not pose significant risks to the robustness of the Trust under a broad range of scenarios.
Directors underscored the importance of closely monitoring the experience with the use of the RCF and RFI, future financing demand, and the PRGT lending capacity as part of the regular reviews of Fund facilities. They also stressed the need for vulnerable countries to continue to enhance economic and financial resilience to shocks and strengthen policy frameworks, including risk reduction planning, noting in this regard that the Fund’s surveillance and technical assistance can play an important role in helping these countries improve disaster preparedness.