The Covid-19 pandemic has created severe disruption in the global financial system, with many emerging market and developing countries (EMDCs) facing liquidity shortages. In the context of intensified demand for liquidity and heightened global uncertainty, on April 15, 2020 the IMF Executive Board approved a Short-term Liquidity Line (SLL).
The SLL is a special facility designed as a revolving and renewable backstop for members with very strong fundamentals and policy track records. It provides liquidity support for members facing potential short-term moderate balance of payments difficulties, reflected in pressures on the capital account and reserves, and resulting from volatility in international capital markets. The SLL aims to reduce the impact of liquidity events and minimize the risk of shocks evolving into deeper crises and generating spillovers to other countries.
Executive Board Assessment1
Executive Directors considered and approved the establishment of the Short-term Liquidity Line (SLL), as part of the Fund’s COVID-19 response. They noted that the SLL would fill a gap in the Fund’s toolkit and complement other layers of the global financial safety net. Directors agreed that the SLL can provide important liquidity support to members with very strong policy frameworks and fundamentals facing potential short-term moderate balance of payments (BOP) difficulties, as specified in the proposed decision. They noted that this could help prevent liquidity pressures developing into solvency crises and avoid spillovers to the broader membership. Despite some differences in views and preferences, Directors were willing to support the proposal in a spirit of compromise.
Directors broadly supported the core design features of the SLL, built on the work done in 2017. They considered that the revolving access of up to 145 percent of quota should provide cover against most repeated moderate shocks that the SLL is designed to address, and that the availability of successor arrangements, subject to continued qualification and the presence of the special BOP need, would ensure that the SLL is a reliable backstop. Directors also noted that having the same high qualification bar as the Flexible Credit Line (FCL) would facilitate transition from the FCL to the relatively lower access of the SLL, allowing more efficient allocation of Fund resources. A few Directors would have preferred a lower qualification bar and/or higher access.
Directors generally supported the innovative features of the SLL designed to minimize perceived stigma associated with Fund financing, including the Board’s approval of an arrangement, conditional on the member availing itself of the arrangement. They recognized
the possibility of a Central Bank sole signatory, provided that certain requirements are met, consistent with the Fund’s standards for the signatory of letters of intent or written communications. A few Directors noted that signatures from both the Ministry of Finance and the Central Bank would increase the credibility of the policy commitment. Directors emphasized the need for careful communication in cases where a member ceases to qualify for an SLL arrangement.
Directors took note of staff’s assessment that SLL usage is likely to have a limited impact on
the Fund’s liquidity position. At the same time, some Directors pointed to second-round effects should countries draw on the SLL and no longer participate in the Financial Transactions Plan and/or the New Arrangements to Borrow (NAB). A few Directors also noted the possibility that the SLL could tie up Fund resources for an extended period. Directors recognized that the potential demand for the SLL combined with other Covid-19 related demand for Fund resources could quickly reduce Fund liquidity to levels that would warrant an activation of the NAB. Given these considerations amid the uncertain global outlook, Directors called for closely monitoring the Fund’s liquidity position.
Directors supported the creation of the SLL for a period of 7 years, with an expectation that, by end-2025, the Executive Board will decide whether to extend the facility beyond the 7-year period. They agreed that this compromise approach would balance concerns about the innovative nature of the SLL and the potential impact on Fund resources. Directors looked forward to reviewing the initial experience with the SLL, as part of the next review of the Fund’s FCL and Precautionary and Liquidity Line in 2022.
Note:
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: http://www.IMF.org/external/np/sec/misc/qualifiers.htm