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Jonas Bunte, December 5th 2005 Shockingly weak Shock-Facility for the Weak Analysis of the new IMF-Exogenous Shocks Facility (ESF) On Wednesday, November 23rd, the IMF was to approve the “Exogenous Shocks Facility”(ESF). It will become effective once the G8-debt cancellation, by now called “Multilateral Debt Relief Initiative (MDRI)”, is officially implemented. This facility outlined by the IMF provides loans to countries hit by an external shock such as a natural disaster or a Terms-of-Trade-Shock. Such an instrument is possibly very useful in smoothing the negative impacts of such shocks. Hence, the IMF was expected to introduce a successor to the old compensation facility CCF that had not been used since 2000. Summary of the positive and negative points to the ESF:
This preliminary assessment of the ESF is structured as follows: First the characteristics of the ESF will be presented. Then a critical assessment of the proposal is undertaken starting with addressing the speed of disbursement. Questioning the timeframe of assistance follows this. Section 4 reviews the eligibility criteria and Section 5 whether the resources provided are sufficient. 1. Characteristics of the ESF Assistance under the new ESF will have the following characteristics: Regarding the amount available, the maximum limit on access to resources is 50% of the country’s quota in the Fund. In exceptional circumstances it shall be possible to exceed this limit. However, the disbursement “shall also take into account the size and likely persistence of the shock”, which is determined by the Fund. The assistance will be given in the form of concessional loans (with 0.5% interest rate), repayments starting 5,5 years after first disbursement in ten semi-annual rates. There will be no rescheduling of repayments possible. Loans shall be disbursed up to one year after the original request with the option to extend the assistance up to two years. The decision on the extension is made by the Fund given a detailed program by the country on how to use the resources in the second year. All PRGF eligible countries (thus with a per capita income of less than 895 $) are qualified to obtain assistance under the ESF. However, these countries may only receive disbursements if there are no other outstanding repayments to the IMF. Furthermore, “a country may not obtain assistance from the Trust under the PRGF and the ESF at the same time”. Similarly, a country may not have more than one ESF arrangement for the same shock. As for the accounting, the current PRGF-Fund is to be renamed to a PRGF-ESF-Fund, which can be accessed by both the PRGF and the ESF. Additionally, a PRGF-Fund and an ESF-Fund shall be created, which can be accessed only by the respective programs. The mechanism itself is supposed to work as follows: First the country asks for a specific amount of assistance due to balance of payments or reserves difficulties as a result of an exogenous shock. This amount will be granted without being challenged by the IMF if the following criteria are met:
2. Critical Assessment First of all the establishment of such a facility was long overdue. Compensation Facilities have been around for quite some time – but they were rarely used by Developing Countries as the assistance was always very slow, expensive and granted only with certain conditions. Hence the IMF’s attempt to create a concessional facility that would disburse resources quickly after a shock is laudable, as the document reads: “When requesting a disbursement under an ESF arrangement, the member shall represent that it has a need because of its balance of payments or its reserve position or developments in its reserves. The Trustee shall not challenge this representation of need prior to providing the member with the requested disbursement.” (emphasis added). However, there is a significant contradiction implied: Funds are supposed to be disbursed without challenge – but only if certain criteria are met beforehand?! According to the document assistance will be given when the IMF knows the following:
The Fund does not provide a specific definition of what exactly constitutes an “exogenous shock”. What happens if the shock is a combination of endogenous and exogenous factors as often the case? Hence it is largely up to the discretionary assessment by the Fund, whether there actually is a shock that would trigger the mechanism. Similarly, no guidelines are available of when a “structural adjustment normally prescribed under a PRGF-Program” is needed and based on what criteria. As these points are not clear it is not possible to determine if the amount of money requested by the country can be released very quickly. This depends on how thoroughly the Fund wants to examine if the criteria described above are met – and to his judgment of questions such as: When does a decline of commodity prices present a shock or a normal market behavior? 3. Adequate time-framework for assistance? ESF loans are supposed to be given only for a year or a maximum of two years with repayment starting after five years of the first disbursement. However, shocks tend to be more persistent. A World Bank staff paper “reveals that the maximum effect of a commodity price shock is typically achieved only after about four years” [1] (also see figure 1). Furthermore, the most common type of shock to LICs, a drop of commodity prices, tends to be persistent with average half-lives that typically excess five years [2]. Additionally, these findings make it difficult comprehend why only one loan will be given for one shock: Is a continuous decline of prices only one shock – or will such a drop be reassessed after some time? 
Source: Varangis, Varma, de Plaa, Nehru (2004), p.9. 4. Eligibility? Even though the criteria of a per capita income of 895$ makes 78 countries potentially eligible, quite some crisis of the more recent history would still not have been covered with this new facility. Considering only the natural disasters the following countries would not have been able to benefit from the facility:
It is not clear, however, why countries with a higher per capita income than 895$ are excluded from this facility. Are they less vulnerable to exogenous shocks? Furthermore, there have been various crises in MICs (see natural disasters cited above, but as well Malaysia 1997, Brazil 1998 etc.), which had tremendous effects on LICs as well. Hence it does not make sense to exclude them from assistance, unless there are other instruments available to them. In face of these questions it is interesting to note that the previous Compensatory Financing Facility (CFF) of the IMF was available to Non-PRGFs as well. 5. Will the assistance be sufficient? The maximum total amount available to all countries would be $11,6 bn. Considering that India with $3bn, Nigeria with $1,3bn and Pakistan with $0,7bn would get the greatest share it would leave an average of $88 Mio. for each of the remaining 75 countries and only once over 4 years. A comparison: The very first assessment by the United Nations Office for the Coordination of Humanitarian Affairs (OCHA) after the Tsunami of 2005 asked for a total assistance of $977 Mio. for six countries: Indonesia, Maldives, Myanmar, Seychelles, Somalia and Sri Lanka. Under the ESF these countries together would have been allowed to request 515 Mio – for all different kinds of shocks occurring through 2009. In the light of other emergency assistance programs primarily in concerned with natural disasters it is understandable that the ESF shall not cover the total loss by an exogenous shock. However, we have to keep in mind the increasing magnitude and frequency of exogenous shocks to developing countries over the last decades [3]. Similarly, let us remember that countries do not only face natural disasters, but even more frequently commodity price shocks, Terms-of-Trade shocks or exchange-rate shocks with similar costs. Each of them will require not a full, but a partial compensation. In this regard a comparison does give an indication of whether the assistance will be able to actually help. In either case, these numbers are only theory as the ESF is supposed to be funded by donations of industrialized countries. At the moment, however, only $2,8 bn shall be raised till 2009 (which equals 25% of the total amount theoretically available to all countries) with annual contribution of $700 Mio. by not further specified donors [4]. Gordon Brown already clarified that he expects the oil-producing countries to share some of their windfall earnings due to the high oil price. By now “8 industrialized countries” have endorsed the ESF – of which are only three known: Great Britain will give $85 Mio, Japan $28,5 and Saudi Arabia with an amount not specified. It seems like neither would be the resources available through the ESF sufficient to cover the various kinds of external shocks experienced by developing countries, nor is the funding for that even secured. [1] Varangis, Varma, de Plaa, Nehru (2004): Exogenous shocks in Low Income Countries: Economic policy issues and the Role of the International Community. p.9 [2] Cashin, Liang, and McDermott (2000): How persistent are shocks to world commodity prices? IMF Staff Papers, Vol. 47, No. 2, pp. 177-217. [3] Varangis, Varma, de Plaa, Nehru (2004): Exogenous shocks in Low Income Countries: Economic policy issues and the Role of the International Community. p.1 [4] http://www.hm-treasury.gov.uk/newsroom_and_speeches/press/2005/press_97_05.cfm |
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