During past financial crises, IMF support was always offered with strings attached, typically imposing tighter fiscal and monetary policies, and often seemingly ideologically driven structural reforms, on the countries concerned. This applied to countries where unsustainable policies had been blatantly exposed by the crisis. But it also applied to countries with policies that were arguably sustainable, particularly if they had access to additional forex reserves to cope with the fallout from crises elsewhere.   

For crisis-hit countries such as Ukraine, Hungary and Latvia, in order to resolve underlying vulnerabilities, recent IMF lending has been accompanied by conditionality, albeit more streamlined than in the past. But, in a major break from the past, the IMF can now also provide selected countries with large-scale finance, free of conditions, via its new Flexible Credit Line (FCL). Earlier this month, it approved a line of $47bn for Mexico, the first country to benefit. While Mexico has no intention yet to draw down the credit line, the FCL provides it with massive insurance at low cost, without requiring any change to policy. Poland, another systemically important EM country, has also confirmed that it has accepted the IMF’s offer of such a condition-free credit line, worth $20.5bn. And yesterday, Columbia became the third country to respond to the IMF’s advances, with its FCL set to be worth $10.4bn. Like Mexico, neither Poland nor Columbia intends to draw down its credit line. But these additional funds nonetheless represent a substantial new line of defence against the potential spread of the global crisis, mitigating re-financing risks, boosting exchange rate stability, and so encouraging new private sector capital flows. And importantly, in marked contrast to previous IMF programmes, countries will be able to run their macroeconomic policies as they see fit, supporting growth through expansionary policy if appropriate.   

While FCL disbursements are not dependent on the fulfilment of policy conditions, eligible countries must have strong fundamentals and policies, meeting the criteria in the table below. Crucially, these criteria are vague. And fulfilment of them all is not necessary, as compensating factors, including corrective policy measures already under way, can also be taken into account. It is therefore difficult to predict the countries to be next in line to benefit from an FCL, but it is worth noting that the first three countries are all geopolitically important, at least from the perspective of the IMF’s largest shareholder, the US.

IMF Flexible Credit Line: Qualification Criteria

 i.  Sustainable external position

ii.  Capital account position dominated by private flows

iii.  Track record of steady sovereign access to international capital markets at favourable terms

iv.  Relatively comfortable reserve position when FCL is requested on a precautionary basis

v.  Sound public finances, including a sustainable public debt position

vi.  Low and stable inflation, in the context of a sound monetary and exchange rate policy framework

vii.  Effective financial sector supervision

ix.  Data transparency and integrity

Source: IMF

Several of the strongest emerging market countries – most obviously China, but also Brazil and India –clearly have no need for an FCL. Others that may benefit from having an FCL in place, including South Korea and the Czech Republic, which also almost certainly qualify, have also stated that they have neither the need nor the desire to arrange such a credit line, seemingly (wrongly, in our view) concerned about the stigma attached to IMF borrowing. And given memories of the political difficulties under its previous IMF programmes, political factors might also deter Indonesian take-up of the FCL.

The next country to arrange an FCL might well be a small country such as Peru. However, amongst other possible candidates, South Africa is one of the more systemically important. Last year, South Africa’s current account deficit touched record levels and inflation reached double digits, so some might question whether it qualifies. But in response to substantial monetary tightening, the current account deficit narrowed in Q408 to its lowest level in nine quarters, while inflation should fall back to the Reserve Bank’s 3-6% target range in Q3. Meanwhile, under Finance Minister Trevor Manuel, fiscal policy has been exemplary, while the banking sector is robust. And so, assuming that next President Jacob Zuma re-appoints Manuel to the Treasury and commits to maintain the existing macroeconomic policy framework, South Africa might in due course also be offered a condition-free credit line from the IMF, providing further support to the recent recovery in South African asset prices. 

 Chris Scicluna, Senior Emerging Markets Economist

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