IMF provides temporary assistance to members to tide over balance of payments deficits. When a country requires foreign exchange, it tenders its own currency to the IMF and gets the required foreign exchange. This is known as ‘drawing’ from the Fund. When the balance of payments position of the country improves, it should ‘repurchase’ its currency from the IMF and repay the foreign exchange.
Ordinarily, a member-country should not borrow more that 25% of its quota in a twelve-month period. The total borrowing of a country can go up to a level where the IMF’s holding of the country’s currency reaches 200% of the quota. For example, if India’s quota is SDR 1,000 million of which SDR 750 million were contributed by her in the form of Indian rupees, the maximum amount that India can borrow from the IMF would be. SDR 1,250 million so that the total holding of Indian rupees by the IMF does not exceed SDR 2,000 million.
However, Article 5 of the Articles of Agreement allows for waiver of this condition at the discretion of the IMF. The Fund can waive the condition considering periodic or exceptional requirements of the member requesting the waiver. There are a number of occasions on which IMF exercised the discretion and allowed the accumulation of member’s currency with it to exceed 200%.
The drawing of resources from the IMF by the member-countries is subject to the Fund’s `Tranche policies’. The word tranche’ means slice in French. Under this policy, the member’s right to draw from the Fund is divided into five tiers or tranches. The borrowing that takes the IMF’s holding of the currency up to 100% of the country’s quota is known as the ‘reserve tranche’ (formerly, gold tranche). Borrowing in addition to the reserve tranche is divided into four tranches, known as the ‘credit tranches’, each equal to 25% of the country’s quota. Drawing from the reserve tranche is without any restriction.
A country should first draw against the reserve tranche and subsequently the first, second, third and fourth credit tranches, in that order. The IMF may be quite liberal in the first credit tranche, but drawings from higher tranches receive greater scrutiny by IMF, the severity of scrutiny increasing with successive tranches. The borrowing country has to justify its action by giving a programme of action in the fiscal, monetary and exchange fields. IMF may decline to allow the drawing if it is not satisfied with the plans.
Compensatory Financing Facility
This facility was introduced in 1963 to provide reserves to countries that are heavily dependent on the export of primary products. Its main purpose is to provide the needed foreign exchange to c try exchange balance of payments deficit due to a temporary export shortfall caused by circumstances beyond the country’s control. Under this scheme, funds equivalent to 100% of its quota can be drawn by a country in addition to those available under the tranche policies.
A country need not exhaust its reserve trenches before making use of the compensatory financing facility. But it must agree to co-operate with the IMF in working out appropriate solutions io its balance of payments problems.
Buffer Stock Financing
Buffer stock is an arrangement of holding the price line of internationally trade:commodity by purchasing and selling the commodity whenever the price goes down or up. The purpose of the buffer stocks of primary products when the country is experiencing balance of payments deficit. A country Making use of this facility can draw up to 45% of the amount of the quota. The IMF has authorized the use of the facility in making contributions to the buffer stocks for sugar, tin and cocoa.
Extended Fund Facility
The extended facility is designed to provide assistance to members to meet their balance of payments deficits for longer periods and in large amounts than authorized under the tranche policies. It is especially designed to help countries suffering serious payments imbalance due to structural maladjustment in production, trade and prices. The country should be prepared to implement a comprehensive set of corrective policies covering a period of two or three years.
Under standby arrangements entered into between the IMF and a member-country, the member is allowed to draw upon the resources of the IMF up to specific limits and within an agreed period. Similarly to an over-draft facility being extended by a bank to its customer, here the IMF extends to its member-country the facility of drawing funds as and when required. Such standby arrangements are to be negotiated between the IMF and individual members. In considering requests for standby arrangements, IMF applies the same appraisal norms as are applicable to its other facilities.
Once the arrangement has been agreed, the request of a member for accommodation should be allowed by IMF without reconsideration of the member’s position at the time of drawing. The advantage under the facility is that the countries which have availed of this arrangement can know for certain and in advance that assistance would be forthcoming from the fund. They can therefore desist from imposing strict exchange and trade controls.
Special Oil Facility
In addition to the permanent facilities, the IMF is empowered to create temporary facilities. Accordingly, a special oil facility was created in 1974 and 1975. Countries facing severe balance of payments deficits due to the unusually high oil import bills during this period were permitted to draw funds from the IMF to tide over the difficulty. IMF borrowed from countries with strong balance of payments, especially the major oil exporting countries, to raise resources for this facility.
Enlarged access policy
The enlarged access policy of IMF, which applies to standby or extended arrangements enabled a member to draw up to 150% of its quota annually or up to 450% of its quota in a period of three years. The current limits are 90% of quota annually, 270% of quota over three years and cumulative limit of 400% of quota. For members undertaking exceptional adjustment programmes the limits are 110%, 300% and 440% of quota respectively.
Structural Adjustment Facility (SAF)
The SAF was established in March 1986 to provide financial assistance on concessional terms in support of the balance of payments adjustment efforts of low-income countries. The loans are provided to countries facing protracted balance of payments problems in support of their medium-term programmes of macro-economic and structural adjustment aimed at fostering growth and strengthening the balance of payments position.
Loans are made in proportion to a member’s quota in the Fund. They are disbursed over a period of 3 years with maximum three-year access to 63.5% of the quota. They carry interest at 1/2% p.a. and have a repayment period of 1/2 to 10 years.
The borrowing country is expected to draw a comprehensive three-year policy framework paper, with the joint assistance of the staff of the World Bank and IMF, setting out the macro-economic three-year period, the strategy and measures to be employed and estimates of financial requirements for the adjustment programme.
Enhanced Structural Adjustment Facility (ESAF)
On December 1987, the IMF established this new facility from which its poorest member-countries can draw when undertaking strong three-year macro-economic and structural programmes. This facility is similar to SAF with regard to interest and repayment and is in addition to the SAF scheme.