Context: The Executive Board of the International Monetary Fund (IMF) allowed an immediate disbursement of $1 billion (around Rs 8,500 crore) under the IMF’s Extended Fund Facility (EFF) to Pakistan.
The IMF Executive Board also approved Pakistan’s request for an arrangement under the Resilience and Sustainability Facility (RSF) of about US$1.4 billion. India abstained from voting in the IMF.
Relevance of the Topic: Prelims: Key facts related to Extended Fund Facility (EEF) and Resilience and Sustainability Facility (RSF).
Extended Fund Facility of IMF
Extended Fund Facility (EFF) provides financial assistance to countries facing serious medium-term balance of payments problems because of structural weaknesses that require time to address.
- The IMF provides assistance under the EFF to countries that do not have enough money to pay their bills to the rest of the world for the goods and services they import.
- The reason for inability to pay is the “structural weaknesses” in their economy, i.e., fundamental problems in an economy that hold back growth and development. This includes:
- Inadequate physical infrastructure
- Lack of an educated workforce
- Underdeveloped financial and banking system
- Inadequate capital required for businesses.
- Such assistance is in the form of a loan that has to be paid back, and not in the form of a grant or aid.
- Extended means that these countries need more time than usual to pay back the money because they need to bring about “structural” changes.
Key details of Extended Fund Facility of IMF
- Eligibility: All member countries facing actual or potential external financing needs.
- Conditionality:
- Countries’ policy commitments are expected to focus on structural reforms and policies to maintain macroeconomic stability.
- Disbursements are conditional on the observance of quantitative performance criteria.
- Review Modalities: Periodic reviews of policies and program implementation, as access to IMF resources occurs in tranches (phasing). The IMF’s Executive Board regularly assesses program performance and can adjust the program to adapt to economic developments.
- Duration: Typically approved for periods of 3 years, but may be approved for periods as long as 4 years to implement deep and sustained structural reforms.
- Repayment: Over 4.5 - 10 years in 12 equal semiannual installments.
- Access limits: Normal access: A member can currently borrow up to 145% of its quota annually and 435% cumulatively.
- Interest rate: Basic rate of charge + Surcharges
- Basic rate of charge: The market-determined Special Drawing Rights (SDR) interest rate and a margin (currently 100 basis points).
Resilience and Sustainability Facility:
- RSF provides affordable longer-term financing to support low-income and vulnerable middle-income countries undertaking macro-critical reforms to reduce the risks to prospective balance of payments (BoP) stability, including those related to climate change and pandemic preparedness.
- Eligible Countries:
- All Poverty Reduction and Growth Trust (PRGT) eligible low-income countries.
- Small states (population under 1.5 million) with per capita GNI below 25 times the 2021 IDA operational cutoff.
- All middle-income countries with per capita GNI below 10 times the 2021 IDA operational cutoff.
- Interest Rate: Very low, often close to the SDR interest rate, with no surcharge.
- Duration:
- It runs together with another IMF program (like SBA or EFF).
- It must last at least 18 months.
- Expires when all amounts available are disbursed. Automatically ends upon the termination, cancellation, or expiry of the concurrent IMF-supported program.
- Repayment: 20-year maturity and a 10.5 year grace period during which no principal is repaid.
India’s Response
- India has conveyed its strong dissent to the IMF’s decision. India highlighted Pakistan’s poor track record using IMF’s funds, pointing to the possibility of misuse of debt financing funds for state-sponsored cross-border terrorism.
- India abstained from voting in the meeting, as there is no option with member countries to vote against such a decision.
Over the past 35 years, Pakistan has entered 28 IMF programmes, including four in the last five years, with negligible structural reforms or lasting economic stability.