December 20, 2010 at 4:34 pm | Posted in Development, Economics, Financial, Globalization, History, Research, World-system | Leave a comment









Dominique Strauss-Kahn, managing director of

the IMF, emphasizes the new FCL instrument

which has recently been renewed in the case of


The IMF’s Flexible Credit Line (FCL)

Ocotober 5, 2010

When a country faces the global effects of an economic crisis and there is a risk that it could have trouble accessing funds in the capital markets, it often needs short-term funding to weather the crisis and reassure financial markets and investors. Even before the recent global economic crisis emerged, the IMF was in the process of reforming how it lends money to countries that find themselves in a cash crunch. The idea was to create different kinds of loans for the very different needs of our 187 member countries. The Flexible Credit Line (FCL) was designed to meet the increased demand for crisis-prevention and crisis-mitigation lending from countries with robust policy frameworks and very strong track records in economic performance. To date, three countries, Poland, Mexico and Colombia, have accessed the FCL: due in part to the favorable market reaction, all three countries have so far not drawn FCL resources.

Flexibility to meet countries’ needs

A key objective of the lending reform is to reduce the perceived stigma of borrowing from the IMF, and to encourage countries to ask for assistance before they face a full blown crisis; in addition, countries with very strong track records can apply for the FCL when faced with actual balance of payments pressures. The flexibility provided by the FCL also means the IMF can meet a broad range of country needs:

Countries have flexibility to draw at any time within a pre-specified window on the credit line, or to treat it as a precautionary instrument.

Assuring qualified countries they have large and up-front access to IMF resources with no ongoing conditions.

The FCL works as a renewable credit line, which at the country’s discretion could initially be for either one- or two-years with a review of eligibility after the first year. If a country decided to draw on the credit line, repayment should take place over a 3¼ to 5 year period.
There is no cap on access to IMF resources, and the need for resources will be assessed on a case-by-case basis.

Low cost to get through tough times

The cost of borrowing under the FCL is the same as that under the Fund’s traditional
Stand-By Arrangement (SBA). If accessing Fund resources on a precautionary basis, countries pay a commitment fee that is refunded if they opt to draw on those resources. The commitment fee increases with the level of access available over a twelve month period, effectively ranging between 24 and 27 basis points for access between 500 and 1000 percent of quota, and higher above 1000 percent of quota.

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. Large loans, with credit outstanding above 300 percent of quota, carry a surcharge of 200 basis points. If credit outstanding remains above 300 percent of quota after three years, the surcharge rises to 300 basis points. The escalation of the surcharge is designed to discourage large and prolonged use of IMF resources. Currently, the effective interest rate under the FCL (or an SBA) for access between 500 and 1000 percent of quota—ranges between 2.1–2.7 percent, rising to about 2.5–3.4 percent after 3 years, and higher above 1000 percent of quota.1 These interest rates exclude a flat 50 bps service charge, which is applied to all Fund disbursements.

Very strong performers qualify

The qualification criteria are the core of the FCL and serve to show the IMF’s confidence in the qualifying member country’s policies and ability to take corrective measures when needed. At the heart of the qualification process is an assessment that the member country:

· Has very strong economic fundamentals and institutional policy frameworks

· Is implementing—and has a sustained track record of implementing—very strong policies

· Remains committed to maintaining such policies in the future.

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

· 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

· No bank solvency problems that pose systemic threats to banking system stability

· Effective financial sector supervision

· Data integrity and transparency.

1 As of September 23, 2010 with the SDR interest rate of 0.31 percent.

IMF Executive Board Renews US$48 Billion Flexible

Credit Line Arrangement with Mexico

Press Release No. 10/114
March 25, 2010

The Executive Board of the International Monetary Fund (IMF) today approved a successor one-year arrangement for Mexico under the Flexible Credit Line (FCL) in an amount equivalent to SDR 31.528 billion (about US$48 billion). The Mexican authorities stated they intend to treat the arrangement as precautionary and do not intend to draw on the line.

The FCL was established on March 24, 2009 as part of a major reform of the Fund’s lending framework (see Press Release No. 09/85). The FCL is designed for crisis prevention purposes as it provides the flexibility to draw on the credit line at any time. Disbursements are not phased nor conditioned on compliance with policy targets as in traditional IMF-supported programs. This flexible access is justified by the very strong track records of countries that qualify for the FCL, which gives confidence that their economic policies will remain strong.

Following the Executive Board discussion of Mexico, Mr. John Lipsky, First Deputy Managing Director and Acting Chairman of the Board, made the following statement:

Mexico has a sustained record of sound economic policies, and has very strong economic fundamentals and frameworks. Public and private debt levels were reduced and balance sheets strengthened in the years before the global crisis. Well implemented rules-based policy mechanisms, including the balanced budget fiscal rule and inflation targeting framework and flexible exchange rate regime, have anchored stability.

This strong policy framework has helped preserve stability during the crisis, and––for the first time in many decades––allowed the authorities to deliver a sizable countercyclical fiscal and monetary policy response. Adroit steps have been taken in various financial market segments to maintain orderly conditions. The authorities have continued to demonstrate their commitment and ability to reform in challenging times, including through the passage of important revenue measures in the 2010 budget that will strengthen the medium-term fiscal outlook. Swift action to secure contingent credit lines during the crisis—from the U.S. Federal Reserve and the International Monetary Fund—also helped maintain external confidence.

On the back of these strong policy measures and improving global economic conditions, growth has resumed since mid-2009, asset prices have recovered from troughs seen at the height of the crisis, and domestic financial stability has been maintained. Looking forward, policies will continue to be underpinned by the rules-based macroeconomic framework, and the authorities intend to continue to react as needed to any future shocks that may arise.

Nonetheless, sizeable downside risks still confront the global economy. It is against this background that, at the authorities’ request, the Executive Board today approved a one-year arrangement under the IMF’s FCL, which the authorities intend to treat as precautionary. This successor FCL arrangement will continue to play an important role in supporting the authorities’ overall macroeconomic strategy and in bolstering confidence until external conditions improve, complementing financing from other multilaterals.

Mexico’s very strong policy frameworks and economic fundamentals, together with the additional insurance provided by the successor arrangement under the FCL, put Mexico in a very strong position to deal with other potential risks that could arise in the period ahead as the global economy continues to gradually recover from the crisis.”

To read the staff report and other documents related to the approval of Mexico’s Flexible Credit Line, please see: http://www.imf.org/external/pubs/ft/scr/2010/cr1081.pdf


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Dominique Strauss-Kahn, managing director of the IMF, emphasizes the new FCL instrument which has recently been renewed in the case of Mexico:

The IMF’s Flexible Credit Line (FCL)


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