THE International Monetary Fund (IMF) has created a new long-term instrument to help countries build resilience to external shocks and ensure sustainable growth.
The facility, which is called the Resilience and Sustainability Trust (RST), already has pledges totalling US$40 billion.
The RST is expected to complement the IMF’s existing lending toolkit by focusing on longer-term structural challenges — including climate change and pandemic preparedness — that entail significant macroeconomic risks and where policy solutions have a strong global public good nature.
About three-quarters of the IMF’s membership will be eligible for longer-term affordable financing from the RST, including all low-income countries, all developing and vulnerable small states, and lower middle-income countries.
Speaking at a recent panel discussion on ‘Building Resilience and Sustainability in the Caribbean’, IMF Managing Director Kristalina Georgieva said, “Structural transformation needs to be funded up front but it is likely to deliver the positive impact overtime. There are many studies that say a dollar spent on resilience would have $4-$7 payoff, but it is not coming immediately. The ultimate goal is to prevent balance of payment shocks in the future and that is strictly within the mandate of the IMF, but we don’t want to kid ourselves that a programme that is three-five years is going to be the right instrument to ask you to pay back in a short period of time for an investment that is for a longer impact.”
Georgieva further stated that support for the RST so far has been overwhelmingly positive.
“We have received already pledges of around US$40 billion and we got these pledges listed on the day of our IMF meeting, which is the governing body of the IMF. We have a target to get US$45 billion, so to get US$40 billion in one meeting, it tells me that this is the right instrument,” she said.
She continued, announcing “we will be starting commitments to countries from October. Meanwhile, we are collecting the pledges, putting in the infrastructure — how we are securing the money so it doesn’t get lost, and we are also rapidly preparing ourselves to work with other institutions so when we engage with the country it is on a foundation already there for climate action.”
The RST will channel Special Drawing Rights (SDRs) contributed by countries with strong external positions to countries where the needs are the greatest.
Deputy Prime Minister of Canada Chrystia Freeland, who was also a panellist, said this instrument is further expected to fill the long-standing gap in financing for middle-income countries at the IMF.
“What about the middle-income countries that have particular vulnerabilities in this case to climate shock that actually have the leadership and ideas, you know what you need to do. The challenge is that you don’t have the fiscal space,” said Freeland.
She stressed that if middle-income countries want more nations to make pledges to the RST, they have to prove that the RST can lead to successful policies.
“The obvious thing is to be persistent and always advocate; but I think the leaders of the Caribbean can play a real leadership role in the whole world by making this facility actually work. Nothing succeeds like success,” Freeland stated.
In the meantime, Prime Minister of Barbados Mia Mottley echoed the sentiments that beyond the RST, the financing options for middle-income countries are few.
“We have very little choices available to us. What is good is that the instruments that the IMF have are not only instruments that relates to debt being incurred and therefore they are policy-based instruments and given the fact that we’ve done a lot of the policy work already, it’s not a far walk for us to do with respect to wanting to unlock the equivalent of what would be US$210 million in Barbados which represents just about four per cent of GDP (gross domestic product) probably at the end of this year.”
In the same vein, she contends that US$40 billion is not enough for the work which needs to be done in developing countries.
“We want to thank all who have contributed to the trust so far but the truth is we are going to need more and we’re going to need more urgently because the timeline within which we have to spend the money for adaptation is short, it’s less than 12 years and we all know that particularly with coastal projects and having to do the feasibility studies that are linked to the calendar year and the moon that it therefore means if you miss one month, you may have to miss a whole year. We recognise that the private sector has no interest in adaptation because there’s no rate of return and if the IMF RST is the only game in town funded at concessional rates for middle-income countries adaptation then that is the message I have to carry to my people in Barbados,” said Mottley.
The RST will be a loan-based trust, with resources mobilised on a voluntary basis. About three-quarters of the IMF’s membership will be eligible for longer-term affordable financing from the RST. Access will be based on the countries’ reforms strength and debt sustainability considerations and capped at the lower of 150 per cent of quota or SDR 1 billion. The loans will have a 20-year maturity and a 10½-year grace period, with borrowers paying an interest rate with a modest margin over the three-month SDR rate, with the most concessional financing terms provided to the poorest countries.
The RST will stand ready to commence lending operations once a critical mass of resources from a broad base of contributors is achieved and once sufficiently robust financial systems and processes are in place, which is anticipated to occur by the end of the year. Fund-raising toward the estimated total resource needs of about SDR 33 billion (equivalent to US$45 billion) will be initiated immediately.