Washington : Challenges from the pandemic, spillovers from geopolitical shocks, and long-standing structural problems pose an enormous impediment for balance of payments stability and resilient and sustainable growth, especially for low-income and vulnerable middle-income countries. In this context, on April 13, 2022, the Executive Board of the International Monetary Fund (IMF) approved the establishment of the Resilience and Sustainability Trust (RST) with effect from May 1, 2022.
The RST will complement the IMF’s existing lending toolkit by focusing on longer-term structural challenges— including climate change and pandemic preparedness—that entail significant macroeconomic risks and where policy solutions have a strong global public good nature . It will channel Special Drawing Rights (SDRs) contributed by countries with strong external positions to countries where the needs are the greatest, providing policy support and affordable longer-term financing to strengthen members’ resilience and sustainability and thereby contributing to prospective balance of payments stability.
The RST will be a loan-based trust, with resources mobilized on a voluntary basis. About three quarters of the IMF’s membership will be eligible for longer-term affordable financing from the RST, including all low-income countries, all developing and vulnerable small states, and lower middle-income countries. Access will be based on the countries’ reforms strength and debt sustainability considerations and capped at the lower of 150 percent of quota or SDR 1 billion. The loans will have a 20-year maturity and a 10½-year grace period, with borrowers paying an interest rate with a modest margin over the three-month SDR rate, with the most concessional financing terms provided to the poorest countries.
The RST will stand ready to commence lending operations once a critical mass of resources from a broad base of contributors is achieved and once sufficiently robust financial systems and processes are in place, which is anticipated to occur by the end of the year. Fundraising toward the estimated total resource needs of about SDR 33 billion (equivalent to US$45 billion) will be initiated immediately.
Executive Board Assessment [1]
Executive Directors approved the establishment of a Resilience and Sustainability Trust (RST) to support member countries’ longer-term structural reform efforts by channeling SDRs to low-income and vulnerable middle-income members. They concurred that the envisaged role of the Trust to provide affordable long-term financing to enhance economic resilience and sustainability would contribute to prospective balance of payments stability, consistent with the Fund’s purposes. Directors noted that the economic costs of not addressing macro-critical longer-term structural challenges could be very high, and the support from the RST combined with the additional financing it will help catalyze would contribute to alleviating these risks.
Most Directors supported RST operations to initially focus on addressing climate change and pandemic preparedness while maintaining flexibility to add additional qualifying challenges in the future with sufficiently broad consensus. A number of Directors, however, proposed expanding from the outset the qualifying challenges to a broader set of longer-term challenges. Directors generally considered that the proposed eligibility criteria, and the resulting list of 143 RST-eligible members, strike the right balance between breadth of access and resource constraints.
Directors broadly welcomed the longer lending terms and endorsed the tiered interest rate structure that increases concessionality for lower income members. They noted that periodic interest rate reviews should balance the need to ensure the financial sustainability of the Trust and provide appropriate terms for borrowers, with an interest rate cap to be considered if needed to protect the lowest income borrowers from rising interest rates, following consultations with contributors.
Directors endorsed the proposed lending modalities under RSF arrangements. They generally supported the requirement for a concurrent IMF instrument with upper-credit tranche-quality conditionality.
Directors agreed with the access norm of 75 percent of quota with an access cap at 150 percent of quota or SDR 1 billion, whichever is lower. Many Directors, however, would have preferred higher access limits for small quota countries, vulnerable states, and other qualifying members with large financing needs to address longer-term challenges. Most Directors agreed that RST access would not count towards triggering existing GRA and PRGT exceptional access policies and high combined access safeguards, although some Directors would have preferred such additional safeguards. Directors also welcomed counting RST credit outstanding toward post-financing assessments triggers, which may be recalibrated as appropriate at the RST review.
Directors endorsed the governance structure of the RST, which places the IMF’s Executive Board at its center, complemented by consultation with contributors on key issues and requiring the consent by contributors for certain amendments that affect key contributor interests. They emphasized the need for a timely, comprehensive review of the RST, in three years at the latest. They also agreed to an interim review to take stock of the initial experience and revisit the set of qualifying structural challenges at around 18 months after its operationalization. Directors looked forward to receiving regular updates on the adequacy of RST resources with the possibility to adopt contingency measures at that time, typically near the end of each financial year, and on an ad hoc basis if warranted.
Noting the large scale of longer-term structural challenges, Directors underscored the importance of close and systematic coordination with the World Bank and other relevant institutions to leverage specialized expertise, provide coherent policy advice, and catalyze financing. They encouraged the prompt development of a coordination framework for pandemic preparedness similar to the proposed framework for climate change.
Directors supported the financial design of the RST based on three pillars: a Loan Account (LA), a Reserve Account (RA), and a Deposit Account (DA). They endorsed the terms of the borrowing agreements for the LA, and the contribution agreements for the RA and the DA as detailed in the RST Instrument, including allowing stand-alone contributions to the RA and DA. Directors concurred that the RST’s robust financial framework and the encashment regime of the LA and DA are critical in maintaining the reserve asset nature of creditors’ claims on those accounts of the Trust.
Directors emphasized that the financial risks associated with RST lending should be managed carefully through a multilayered risk management framework, including assessments of the member’s capacity to repay and debt sustainability and the RST’s financial design. They stressed the importance of building up strong buffers via gross and net reserves to safeguard against financial risk and to cover administrative expenses of the Trust. Directors called on all Fund members, within the limits of their laws, to treat the RST as a preferred creditor, consistent with such treatment of the GRA and PRGT.
Directors recognized the importance of raising sufficient contributions to meet estimated demand for RST financing, calling on members with stronger external positions to finalize contribution agreements in time to start RST operations around the time of the 2022 Annual Meetings. They supported pooling RST assets with those of the PRGT for investment purposes, and urged contributors to the PRGT’s subsidy accounts to consent in a timely manner to the proposed amendment to the PRGT Instrument that would enable such pooling, which is key for RST operationalization. Directors expected that SDR contributors to the RST would participate actively in SDR transactions through their Voluntary Trading Arrangements to support the conversion of channeled SDRs into currencies.
Directors recognized that implementation of the RST would result in new demands on staff resources. They agreed that the RST should pay a fee to the GRA to cover trust management activities which would constitute budget receipts. Directors supported reimbursement of the GRA for the cost of administering the Trust excluding activities covered by the fee, which would be discussed in the context of the annual income paper.
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