Washington, DC: On April 4, 2022, the Executive Board of the International Monetary Fund (IMF) reviewed the adequacy of the finances of thePoverty Reduction and Growth Trust(PRGT). The PRGT is the Fund’s main vehicle for providing concessional loans (currently at zero interest rates) to low‑income countries (LICs). This was the first review since thecomprehensive reformof the PRGT in July 2021, which raised the normal access limits for concessional lending to be in line with those for non-concessional lending and eliminated hard caps on access for the poorest members.
This review comes against the backdrop of continued high demand for PRGT lending which has been shifting from the emergency support that predominated in 2020 to multiyear Fund-supported programs. PRGT loan commitments were high at SDR 6 billion in 2021, only slightly below their peak of SDR 6.5 billion in 2020. The demand for PRGT lending is anticipated to remain elevated in 2022-24, with the outlook subject to considerable uncertainty, including due to the war in Ukraine.
As part of the July 2021 reforms, the IMF’s Executive Board approved a two-stage funding strategy to cover the cost of concessional lending to LICs through 2024 while also supporting the longer-term lending capacity of the PRGT. The first stage focuses on 2021-24 and aims to raise SDR 12.6 billion in PRGT loan resources and SDR 2.3 billion in contributions from member countries for subsidy resources (which enable lending at zero interest rates). Over half of the necessary loan resources – SDR 7.3 billion – have already been pledged. However, with pledges for only SDR 0.5 billion in subsidy resources received so far, efforts are ongoing to seek additional pledges and ensure the PRGT is adequately funded over the medium and long term. The second stage of the funding strategy will be implemented following a comprehensive review of concessional financing and policies in 2024/25.
In 2020-21 most of the resources required for debt relief initiatives were successfully mobilized. However, staff is working to mobilize additional grant resources to address the underfunding of the Catastrophe Containment and Relief Trust (CCRT)-which allows the IMF to provide grants for debt service relief for the poorest and most vulnerable countries-and replenish the cash buffer available to respond to future qualifying events.
Executive Board Assessment[1]
Executive Directors welcomed the first Review of the Adequacy of Poverty Reduction and Growth Trust (PRGT) Finances since the comprehensive reforms were approved in July 2021. They agreed that the PRGT had provided unprecedented and critical support to low-income countries (LICs) during 2020-21, particularly to meet pandemic-related challenges. Looking ahead, Directors considered it essential for the PRGT to continue supporting LICs to facilitate sustainable post-pandemic recovery and to cope with adverse spillovers from the war in Ukraine.
Directors welcomed the robust shift from emergency financing in 2020 toward multi-year Fund engagement. While the immediacy of the health crisis and sudden drop in global economic activity had necessitated an urgent response, they considered that close engagement under multi-year Fund-supported arrangements is better placed to lay the foundations for sustained recovery.
Directors expressed concerns that prospects for many LICs had been further disrupted by the war in Ukraine, with spillovers through pressures on food and fuel prices threatening social stability and food security, in addition to existing challenges. They considered that these adverse developments made it more likely that demand for concessional financing would remain elevated over the near and medium terms.
In that context, Directors were reassured by the expansion of LICs’ concessional borrowing space from the 2021 PRGT reforms. They underscored that PRGT arrangements could support LICs in developing appropriate policy responses to recent challenges. Directors also noted that the unprecedented increase in PRGT credit outstanding reduced the reserve account coverage ratio below its historical average and called for close monitoring. Directors welcomed staff’s assurances that the Board would be quickly alerted if the reserve coverage ratio is projected to drop below 20 percent. Moreover, they highlighted that risks from elevated lending levels should be mitigated by the Fund’s multilayered risk management framework, continued reliance on multi-year program engagement, and full implementation of the enhanced safeguards on debt sustainability and capacity to repay introduced in 2021.
Directors endorsed the resilient design of the two-stage funding strategy for the PRGT. While the Baseline lending scenario already allows for historically elevated lending until 2024, they welcomed that the strategy is sufficiently robust to accommodate a High Case scenario. Directors concurred that, if such a scenario arose, additional subsidy needs would be addressed in the second stage of the funding strategy, as part of the next comprehensive review of the PRGT planned for 2024/25. The further use of IMF internal resources, including gold sales, would be carefully considered at that time to ensure the long-term sustainability of the PRGT. Many Directors, therefore, saw merit in commencing early analytical work on the potential use of internal Fund resources ahead of the second funding stage, while some other Directors emphasized the importance of waiting to undertake this work during the next review. A few Directors underscored that extending the suspension of the reimbursement of administrative expenditures to the GRA for a longer period would be a low hanging fruit to strengthen PRGT finances.
Directors welcomed the generous pledges for loan and subsidy resources made by many members. They expressed concerns, however, about the significant shortfall in the pledges compared to the loan and subsidy targets for the first stage of the funding package agreed in July 2021, especially in view of upside risks to PRGT demand and the potential risks to the PRGT’s self-sustained lending capacity. In this regard, Directors encouraged economically stronger members to contribute to the agreed broad burden-shared funding campaign and redouble their efforts to make pledges in a timely manner, utilizing the flexibility available in timing and modalities as needed. Directors also urged strong continued engagement by staff and management.
Directors agreed that PRGT finances were evolving broadly in line with the 2021 assessment and that more time was needed for efforts to mobilize PRGT resources to meet the agreed first stage funding targets. They considered that, while contingent measures are not warranted at the current juncture, recent developments reinforced the importance of keeping the adequacy of PRGT resources under close review. If significant resource shortfalls were to emerge, Directors noted that corrective measures could be taken if deemed appropriate. They therefore looked forward to the next annual Review of the Adequacy of PRGT Finances, while calling for interim informal updates as needed.
Directors noted that the Catastrophe Containment and Relief Trust (CCRT) remains underfunded and emphasized the need for additional grant resources to replenish its cash buffer. They looked forward to the comprehensive CCRT review planned for FY2023.
[1]At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country’s authorities. An explanation of any qualifiers used in summings up can be found here:https://www.IMF.org/external/np/sec/misc/qualifiers.htm.