The International Monetary Fund is struggling to find countries willing to use its new precautionary credit lines, even as capital exits emerging markets, because borrowing from the fund still carries a stigma, IMF staff said a report.
While they proved effective in reducing sovereign bonds’ spreads in countries that use them, the lending instruments created after the 2008 financial crisis have only attracted a handful of nations, according to the report released today.
“At the same time, some emerging markets -- feeling vulnerable to heightened capital flow volatility but unwilling to request fund arrangements -- are seeking to expand regional financing arrangements and networks of bilateral swap arrangements,” the IMF staff wrote. “To a large degree, this reflects the degree of political stigma related to fund engagement that prevents some members from seeking preemptive fund financial support.”
The Washington-based fund says it has learned from its mistakes in the Asian and Latin American crises of the late 1990s-early 2000s, when its austerity prescriptions alienated people from Indonesia to Argentina. It has eased its opposition to capital controls, given countries such as Portugal more time to meet budget-deficit targets and is now criticizing income inequalities as bad for economic growth.
Still, only Mexico, Poland and Colombia turned to its flexible credit line, which comes with no conditions for countries that pre-qualify. The precautionary and liquidity line, which is available with limited prescriptions to countries with slightly less strong fundamentals, is used only by Morocco.
The report also looks into the rapid financing instrument, which was conceived in 2011 for countries facing shocks and in need of emergency assistance while they work on getting larger funding. While no one has tapped it yet, the facility was mentioned by a U.S. Treasury official yesterday as one possible way to immediately help the fledgling interim government of Ukraine while it negotiates a traditional loan.
A reason for the lack of success is that the amount available with that facility is low, according to the report. In Egypt for instance, the potential financing needs would have been 20 times the limit, it said. According to its rules, Ukraine today could access little more than $1 billion.
Still, the facility “may still fill a critical gap” in the IMF’s tool kit, IMF economists wrote. “Staff proposes to keep the current access limit in line with the need to safeguard Fund resources.”