WASHINGTON – The International Monetary Fund on Friday unveiled a set of measures to overhaul its lending mechanism, shifting the fund’s role to precautionary short-term lending to prevent crises.
The package is apparently in response to global criticism, especially from the United States, a country with the biggest voting power in the body, of the IMF’s handling of the 1997 Asian financial crisis.
The measures, approved by the IMF’s 24-member executive board, will be further discussed at a series of international financial meetings starting in the Czech capital, Prague, this week.
The centerpiece of the package is making the IMF’s never-used contingent credit line (CCL), a precautionary short-term lending mechanism, easier to use by reducing the cost of borrowing and eliminating the commitment fee, IMF officials said.
Established in April 1999, the CCL is designed to provide short-term financing to IMF member countries with balance of payments problems arising from a sudden and disruptive loss of market confidence.
The facility is meant solely for members with potential vulnerability to contagion but not facing a crisis at the time of the commitment.
Despite strong encouragement for its use by the IMF, no single country has yet tapped into the program.
The package also includes discouraging long-term and repeat borrowing to avoid overuse of IMF funds.
Specifically, the IMF agreed to raise lending charges on IMF borrowing in line with the length of time it takes countries to repay debts, the officials said, maintaining that the stricter conditions are meant to promote self-help rehabilitation efforts by recipient countries.
Two lending facilities are expected to be subject to this penalty — the regular standby arrangement, which provides short-term financing to alleviate balance-of-payments problems, and the extended fund facility, which is designed to promote long-term structural reform.
The proposed overhaul marks “an important step forward in the modernization of IMF lending,” Thomas Dawson, director at the IMF’s external department, said in a statement.
The overhaul is basically in line with proposals put forward by U.S. Treasury Secretary Lawrence Summers, who has long been lobbying for the IMF to shift toward emergency short-term lending while leaving most long-term assistance to the IMF’s sister lending agency, the World Bank.
“This agreement is a key step toward the kind of change that we have been advocating to modernize the IMF in line with the challenges of today’s global financial markets,” Summers said in a statement.
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