The Executive Board of the International Monetary Fund (IMF) endorsed today the recommendations of the IMF staff paper “Policy Reform Proposals to Promote the Fund’s Capacity to Support Countries Undertaking Debt Restructurings.” The reforms are designed to ensure a more agile approach to IMF support to countries undertaking debt restructuring while maintaining adequate safeguards for IMF financing and reinforcing the existing architecture for debt resolution.

A number of recent IMF-supported programs involving debt restructurings experienced significant delays from the time Staff Level Agreement was reached until the time the necessary official creditor assurances were provided to allow the approval of IMF financing.

There has been a marked improvement lately and cases are moving forward more quickly, with substantial progress in collaboration among official bilateral creditors. For example, while it took Chad 11 months to move from a Staff-Level Agreement with the IMF staff to secure the creditor assurances needed for approval of IMF financing; it took Zambia 9 months to reach this milestone, Sri Lanka 6 months, and Ghana 5 months. But more progress is needed.

The staff paper draws lessons from this experience and proposes a set of reforms in five areas, which should ensure a smoother and speedier process in the future:

(i) clarifying when and how to apply additional safeguards under IMF’s financing into official arrears policy, which should help avoid delays at this stage;

(ii) strengthening the effectiveness and broadening the applicability of financing assurances reviews when there is an ongoing debt restructuring, to better encourage adequate progress with the restructuring;

(iii) establishing a more robust and agile approach for deriving financing assurances from official bilateral creditors (based on supporting and observing their processes) with the aim to establish these assurances more rapidly;

(iv) adjusting the IMF’s Approval-in-Principle procedures so that they can be used to provide a modality for IMF engagement with the member until financing assurances are established for IMF financing; and

(v) clarifying how the IMF can provide support to members facing arrears to official creditors when they also face an emergency situation, like a natural disaster.

The reforms are designed to support the existing architecture for debt resolution, preserving and complementing what works well while addressing time gaps that can be created by IMF requirements and enhancing information flows. The reforms recognize different official creditor processes and provide a robust framework to support their participation in restructurings on terms consistent with restoring debt sustainability. The reforms are also consistent with different sequencing of official and private restructurings (although this choice remains with the debtor and creditors). For the IMF, the reforms are overall expected to promote more agile engagement while maintaining adequate safeguards.

Executive Board Assessment[1]

1. Directors welcomed the opportunity to consider reforms to promote the Fund’s capacity to support countries undertaking debt restructurings. Directors agreed that, notwithstanding substantial progress in recent cases, the Fund’s ability to assist members in resolving their balance of payments problems may still be constrained. Directors, therefore, appreciated the opportunity to consider certain policy reforms to better reflect the current context. Directors agreed that the proposals endorsed today are accurately reflected in the Executive Board understandings in Supplement 3 of SM/24/65 to be issued shortly.

Strands 1, 2 and 3 under the LIOA

2. Directors agreed that the Lending Into Official Arrears (LIOA) policy remains broadly appropriate and that the current guidance on application of the first, second, and third strands of the policy should be retained. Most Directors agreed that Strand 1–creditor coordination through a representative standing forum such as the Paris Club or the Common Framework involving the Paris Club–should remain the central focus of the LIOA policy and should be used whenever it is or becomes available. A few Directors stressed the urgency of recognizing the G20 Common Framework more generally as a representative standing forum. Directors also reiterated that, consistent with its current policy, the Fund would normally not apply Strand 3 (i.e., the three criteria) to a creditor or a group of creditors with an adequately representative share of total financing contributions, in particular assessing whether the Fund support would have an undue negative effect on the Fund’s ability to mobilize official financing packages in future cases.

Strand 4 under the LIOA

3. At the same time, Directors agreed on the need to clarify how to apply additional safeguards for Fund lending when the three existing strands cannot provide a pathway forward. In this regard, Directors supported the addition of a fourth strand under which the Fund shall seek additional safeguards where an adequately representative agreement has not been reached through a representative standing forum, consent is not forthcoming within 4 weeks of being requested, andthe three criteria under Strand 3 cannot be satisfied with respect to an official bilateral creditor. The approach would distinguish the Fund-supported programs with normal access from those with exceptional access under the GRA or the PRGT or high combined access under the GRA and PRGT.

4. In the first case, Directors agreed that the “standard safeguards approach” would apply (except as noted below). This would require a combination of program design elements–including the phasing of access under the arrangement (with an initial purchase or disbursement capped at low access), program conditionality to support the restructuring process where warranted under the Guidelines on Conditionality, and a debtor commitment to good faith efforts to establish safeguards for Fund lending.

5. In the second case, Directors agreed that the “enhanced safeguards approach” would apply, which requires the debtor commitment and conditionality requirements under the standard safeguards approach, and in addition a direct commitment to the Fund by a sufficient set of creditors about their restructuring intentions. Where such a commitment is provided, arrears would be considered eliminated (for purposes of the application of the LIOA policy) for both participating and non-participating creditors. Directors agreed with the definition of a “sufficient set” of creditors and the description of the type of commitment as set out in paragraph 22 of the paper. A “sufficient set” of creditors requires the participation of any standing creditor forum as well as any creditors with significant influence over the debtor. For this purpose, a creditor is considered to have significant influence over the debtor when it has the ability to extract repayment on more favorable terms, inconsistent with program parameters.

6. Directors agreed that the standard safeguards approach will normally be sufficient for normal access cases that fall under Strand 4, but complex cases, involving the prospect of prolonged negotiations or creditor coordination issues would necessitate a shift to the enhanced safeguards approach. Thus, the Strand 4 approach would shift to enhanced safeguards based on an explicit signal that a creditor or creditor group to which the three criteria in Strand 3 cannot be satisfied either: (1) is unwilling to restructure their claims in line with program parameters; or (2) views additional support by the Fund to the debtor’s effort to coordinate with creditors to be essential. Directors emphasized that it would be important for a Staff Report to transparently and factually explain which creditor(s) requested it, and the reason for a shift under normal access to the enhanced safeguards approach and to limit stigma associated with any request for this shift. A few Directors asked for granular information if available about which members in any creditor group made the request.

7. Directors also agreed that to further support debtor and creditor efforts towards comparability of treatment, the Fund would subject any arrears arising out of exercise of a contractual comparability of treatment clause to the Fund’s non-toleration of arrears policy, as set out in paragraph 21 of the paper.

Financing Assurances Reviews

8. Directors also supported strengthening financing assurances reviews under the LIOA and LIA policies while external arrears remain unresolved, and introducing financing assurances reviews both in cases where arrears are deemed away under Strands 1 and 4 under the LIOA policy and in preemptive restructuring cases needed to restore debt sustainability involving official bilateral creditors until the needed restructuring is complete. Financing assurances reviews would continue to provide the Fund with the opportunity to assess continued compliance with the applicable arrears and financing assurances policies, whether the member’s adjustment efforts are undermined by developments in debtor and creditor relations, and whether, in light of progress, the debt situation does not undermine the restoration of the member’s medium-term external viability and its capacity to repay the Fund.

9. Directors agreed that in these cases, requests for new Fund financing should lay out the expected steps and schedule for the restructuring process in an indicative way. Subsequent reviews should detail progress against that schedule taking into account all developments to determine whether the restructuring remains on track to ensure that overall program objectives are met. Directors called for transparency in any staff assessment on the consistency of debt restructuring plans with program parameters. They further supported the proposal that financing assurances reviews should more explicitly assess whether the Fund still has appropriate safeguards to proceed with the financing in light of progress with the restructuring, or needs to introduce additional safeguards. They stressed that such additional safeguards should be introduced in a manner well-tailored to the situation and reason for any delay with most Directors agreeing that a clear signal about a creditor’s unwillingness to restructure would motivate a shift to enhanced safeguards.

10. Directors agreed that in line with the proposal to use financing assurances reviews to more effectively monitor progress in debt restructurings, going forward, the application of Strand 1 to ongoing and future debt restructuring cases after the effective date of these policy changes would also require the completion of a financing assurances review until such arrears are resolved.

Credible official creditor process

11. For restructuring cases where financing assurances need to be obtained from official bilateral creditors–namely, pre-emptive cases and Strand 1 and 4 of the LIOA policy–Directors agreed that such assurances could be obtained through the Fund’s assessment that a “credible official creditor process” is underway. Directors stressed the need for clear guidance on the criteria that the assessment could be built on. In this context they noted that each creditor would need to establish a robust track record in delivering timely and successful debt restructurings on which the Fund could base its understanding of the process, key decisionmakers involved, and the expected timeframe for the completion of the debt restructuring, such that an assessment could be made that the key stage had been reached that would provide the Fund with the necessary assurances. They also noted that in the absence of sufficient information or a robust track record to make such an assessment, required financing assurances could continue to be satisfied by specific and credible assurances on debt relief/financing. Directors stressed that it would be important that assessments of COCP be made in a transparent, evenhanded, and fair manner with enough granularity and robust evidence to allow the Board to make this delicate judgment. They agreed that the process of establishing a track record for each of the non-PC creditors’ processes could in principle move broadly at the same speed, since any restructuring case typically involves multiple non-PC creditors.

12. Directors endorsed the proposal that, in pre-emptive cases, financing assurances would only be sought from a “sufficient set” of creditors, as set out in paragraph 22 of the paper. Directors agreed that the policy for preemptive restructuring cases for private creditors remains unchanged.

Exceptional circumstances under the LIOA

13. Directors supported the proposed clarification and guidance on the “exceptional circumstances” clause in the LIOA policy. First, Directors agreed that the “exceptional circumstances” clause in the LIOA policy should focus on natural disasters and a subset of other exogenous shocks, such as large or global shocks. Second, in assessing whether Fund support would be expected to advance normalization of relations with official bilateral creditors and the resolution of the arrears, the Fund’s assessment would be based on the debtor’s commitment to make good faith efforts toward resolving the arrears and to conduct itself in a way to promote and encourage creditor coordination. Third, Directors expected that the “exceptional circumstances” clause would generally not be satisfied for cases with long-standing arrears. Finally, Directors agreed that no change to the qualification criteria for emergency financing instruments is required. However, they clarified that, where a staff-level agreement has already been reached for an upper-credit-tranche (UCT) program for a member undergoing a debt restructuring but an emergency situation arises that requires the UCT program to be redesigned, redesigning the UCT program may be infeasible in the emergency timeframe. Directors stressed that even in emergency situations, the best course of action in a restructuring remains to work towards a UCT program, and the provision of emergency financing should not undermine any broader effort underway to secure such a program.

Approval in Principle

14. Directors recognized the continued utility of the Approval in Principle (AIP) as an optional procedural device to bridge engagement gaps when agreement on policies has been reached with the member but financing assurances to restore debt sustainability have not been received. They agreed that a few clarifications to the AIP are warranted in such cases. A decision to approve an arrangement in principle shall specify the date by which the approval would lapse, which would normally be no later than 4 months after approval. A new AIP shall only be permitted once and would normally be subject to a limit of an additional 4 months. The Fund would only approve a new AIP if the financing assurances restoring debt sustainability are likely to be delivered and that the member’s economic program is being implemented as agreed and remains on track. Once the financing assurances have been obtained, a second decision of the Executive Board is required to make the arrangement effective, which is normally adopted on a Lapse of Time basis. Directors stressed that, in all cases, staff should aim to bring a UCT program forward for Executive Board consideration as fast as possible.

15. Directors agreed that the above policy changes will enter into effect immediately and will apply to all future purchases and disbursements, including under existing arrangements, where the relevant policies apply. They emphasized the need for careful implementation to ensure their effective, transparent and evenhanded application, with a few Directors stressing in particular the need to minimize the risk of increasing the burden on debtor countries. Directors called for effective communication of the policy changes to all stakeholders, including through the planned Guidance, as well as for adequate support through capacity development and close cooperation with other workstreams, including the Common Framework and the Global Sovereign Debt Roundtable. Directors agreed to maintain the review of the LIOA policy, including the present reforms, onan as needed basis.

[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: .