Expanding Global Liquidity Insurance: Myths and Realities of the IMF's Precautionary Credit Lines

43 Pages Posted: 12 Apr 2017

See all articles by Nancy Birdsall

Nancy Birdsall

Center for Global Development

Liliana Rojas-Suarez

Center for Global Development

Anna Diofasi

Center for Global Development

Date Written: February 28, 2017

Abstract

Despite increasing volatility in the global economy, the uptake of the IMF’s two precautionary credit lines, the Flexible Credit Line (FCL) and the Precautionary and Liquidity Line (PLL), has remained limited — currently to just four countries. The two new lending instruments were created in the wake of the global financial crisis of 2008 to enable IMF member states to respond quickly and effectively to temporary balance of payment needs resulting from external shocks. Both credit lines offer immediate access to considerable sums — over 10 times a country’s IMF quota in some cases with no (FCL) or very limited (PLL) conditionality. This paper addresses four misconceptions (or ‘myths’) that have likely played a role in the limited utilization of the two precautionary credit lines: 1) too stringent qualification criteria that limit country eligibility; 2) insufficient IMF resources; 3) high costs of precautionary borrowing; and 4) the economic stigma associated with IMF assistance. We show, in fact, that the pool of eligible member states is likely to be seven to eight times larger than the number of current users; that with the 2016 quota reform IMF resources are more than adequate to support a larger precautionary portfolio; that the two IMF credit lines are among the least costly and most advantageous instruments for liquidity support countries have; and that there is no evidence of negative market developments for countries now participating in the precautionary lines.

Keywords: International Monetary Fund, precautionary finance, financial crisis management

JEL Classification: F30, F33, E59

Suggested Citation

Birdsall, Nancy and Rojas-Suarez, Liliana and Diofasi, Anna, Expanding Global Liquidity Insurance: Myths and Realities of the IMF's Precautionary Credit Lines (February 28, 2017). Center for Global Development Working Paper No. 449. Available at SSRN: https://ssrn.com/abstract=2951790 or http://dx.doi.org/10.2139/ssrn.2951790

Nancy Birdsall (Contact Author)

Center for Global Development ( email )

2055 L St. NW
5th floor
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202-416-0700 (Phone)

Liliana Rojas-Suarez

Center for Global Development ( email )

2055 L St. NW
5th floor
Washington, DC 20036
United States

Anna Diofasi

Center for Global Development ( email )

2055 L St. NW
5th floor
Washington, DC 20036
United States

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