IMF’s Extended Fund Facility

IMF’s Extended Fund Facility

Context: The International Monetary Fund (IMF) and Pakistan on Tuesday reached a staff-level agreement that Pakistan had completed reforms required for the release of around $500 million in IMF funds. Further review of reform may give it access to $6 billion from the IMF’s Extended Fund Facility (EFF)

Concept:

• The IMF funding for Pakistan had been suspended for about a year subject to the reforms.
• The need for IMF support arose as Pakistan economy has been facing economic woes (Declining growth, unsustainable debt, excahnge worries etc.)
• The package strikes an appropriate balance between supporting the economy, ensuring debt sustainability and advancing structural reform.

About EFF:

• It is a fund created by IMF for helping economies to address serious medium-term balance of payments problems because of structural weaknesses that require time to address.
• Assistance under an extended arrangement features longer program engagement to help countries implement medium-term structural reforms with a longer repayment period.
• It provides for support for comprehensive programs including the policies needed to correct structural imbalances over an extended period.
• Typically approved for periods of three years, but may be approved for periods as long as 4 years (repaid over 4.5–10 years in 12 equal semiannual installments unlike Stand-By Agreement facility which provides support for short period with repayment period of 3.5–5 years.)

Conditions to get help

• When a country borrows from the IMF, it commits to undertake policies to overcome economic and structural problems
• The IMF’s Executive Board regularly assesses program performance and can adjust the program to adapt to economic developments.
• Lending is tied to the IMF’s market-related interest rate, known as the basic rate of charge, which is linked to the Fund’s Special Drawing Rights (SDR) interest rate.
• EFF is guided by a country’s financing needs, capacity to repay, and track record with past use of IMF resources:
• Normal access: Borrowing under an EFF is subject to the normal limit of 145 percent annually of a country’s IMF quota, (IMF quota broadly reflects a country’s position in the global economy), and a cumulative limit over the life of the program of 435 percent of its quota, net of scheduled repayments.
• Exceptional access: The Fund may lend amounts exceeding these limits in exceptional circumstances provided that a country satisfies a predetermined set of criteria.