Making Sense Of IMF Credit Facility

By Sirimevan Colombage –June 27, 2016

Prof. Sirimevan Colombage

The landmark credit facility approved by the International Monetary Fund (IMF) early this month is not only a relief to ease the country’s severe external payments imbalance but also an opportunity to jump-start the long-overdue economic reforms. The facility amounting to US $ 1.5 billion comes under the Fund’s Extended Fund Facility (EFF). This three-year arrangement aims to meet balance of payments needs arising from the weakening external finance situation and pressures that may persist during the adjustment period.

Correcting economic misalignments

The arrangement is a signal to global capital markets that the government is keen on economic recovery. It thereby enhances investor confidence and provides the necessary support to execute the reforms.

Hence, it is the utmost responsibility of the government to ensure strict adherence to the reform agenda so as to rectify the prolonged macroeconomic misalignments. In the past, many such programs did not succeed due to the then governments’ failure to implement bold reforms for political reasons. The adverse effects of such negligence still haunt the economy. The success of the present program too will depend on the commitment on the part of the government.

The reform package along with the market-responsive exchange rate and interest rate systems which are now in place would facilitate rectifying the economic disarrays.

Confidence booster

Some critics argue that the IMF facility is hardly sufficient to meet the country’s external payments commitments which run to the tune of over $ 5 billion for the next 12 months. But the point is the program with the IMF has wider implications than its financial assistance per se. It is more a confidence booster giving positive signals to global investors that investment climate is going to be improved through structural adjustments under the stipulated reform agenda.

Strong focus on structural reforms

The EFF has been designed to provide assistance to countries experiencing severe payments imbalances due to structural impediments, or to countries characterized by slow growth and an inherently weak balance of payments position. The EFF provides assistance in support of comprehensive programs that include policies required to correct structural imbalances over an extended period. Given the longer time needed to correct deep-rooted structural weaknesses, the implementation of EFF and its repayment period are longer than most other Fund arrangements.

When a country borrows from the IMF, it commits to undertake policies to overcome its economic and structural problems. Under an EFF, these commitments, including specific conditionality, usually have a strong focus on structural reforms to address institutional or economic weaknesses, in addition to policies that maintain macroeconomic stability. The IMF assesses the program performance regularly allowing to readjust it depending on economic changes.

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