Yesterday, the International Monetary Fund (IMF) announced that it had expanded and enhanced its lending tools to help contain the occurrence of financial crises. As part of ongoing efforts to enhance the IMF’s crisis-prevention capabilities, the IMF’s Executive Board increased the duration and credit available under the existing Flexible Credit Line (FCL) and established a new Precautionary Credit Line (PCL) for members who, despite sound fiscal policies, may not meet the FCL’s stringent qualification requirements.

IMF Managing Director Dominique Strauss-Kahn stated that “The enhanced Flexible Credit Line and new Precautionary Credit Line will enable the Fund to help its members protect themselves against excessive market volatility.”

The enhancement of the FCL and the creation of the PCL are intended to encourage countries to approach the IMF in a more timely fashion in order to help prevent a crisis and to protect such countries during a systemic financial crisis. Mr. Strauss-Kahn stated that the IMF expects that “the availability of these credit lines to a broader spectrum of countries will contribute to a more stable international monetary system.”

The PCL will be available to a wider group of members than those that qualify for the FCL. Qualification for the PCL will be assessed in the following five general areas: (i) external position and market access, (ii) fiscal policy, (iii) monetary policy, (iv) financial sector soundness and supervision, and (v) data adequacy. Notable features of the PCL include:

  • Streamlined ex post conditions designed to reduce any economic vulnerabilities identified in the qualification process, with progress monitored through semi-annual program reviews; and
  • Frontloaded access with up to 500% of quota made available on approval of the arrangement and up to a total of 1000% of quota after 12 months.