International Monetary Fund: Short-Term Liquidity Line, 2020

The COVID-19 pandemic severely disrupted global financial markets. Many countries suffered significant capital outflows and short-term liquidity pressures. The IMF created the SLL to fill a gap in its liquidity toolkit. Unlike the IMF’s other programs, the SLL targeted countries with strong fundamentals that wanted to avoid the stigma or conditionality associated with IMF programs. The IMF designed the SLL as a precautionary revolving and renewable backstop for IMF members with “very strong fundamentals and policy track records” facing moderate, short-term balance-of-payments needs (IMF 2020a; IMF 2022a). By offering a revolving purchase-repurchase agreement, the IMF provided liquidity to members expecting short-term capital account and reserves pressures owing to volatility in international markets. The IMF said it did not intend the program to assist countries whose balance-of-payments needs had been caused by their own domestic policy decisions. The SLL was available to members who could reasonably expect these balance-of-payments issues to be limited in scale and impact and required nothing more of the member than finetuning its monetary and exchange rate policies. The SLL aimed to reduce the impact of disruptive liquidity events and minimize the risk of shocks evolving into deeper crises and spilling over to other IMF members. It also served as a complement to the FCL, which offered larger loans (IMF 2020a).

The IMF entered the pandemic with USD 1 trillion of lending capacity, some of which it deployed to 86 of its 190 members either through the emergency lending account for members with strong fundamentals (the GRA) or the on-lending program for low-income members (the PRGT) (see Figure 5). Often, an IMF lending arrangement can reassure private and official creditors about the soundness of a member country’s medium-term viability (IMF 2021f).

Figure 5: Total IMF Lending Commitments

Note: Dotted line indicates approximate launch date of the SLL, April 15, 2020.

Those members whose balance-of-payments needs and policy records met the criteria of the FCL but who lacked the strong fundamentals required for FCL access could tap the PLL, a credit line (delivered in tranches) introduced in 2011 that offered up to 250% of the member’s quota annually and 500% of quota cumulatively (although actual caps depended on the program’s duration and the IMF’s evaluation of its success) (IMF 2018b). Immediate balance-of-payments needs could be met by purchasing foreign currency from the RFI,^FNThe RFI replaced the IMF’s pre-existing emergency assistance policy, which encompassed Emergency Natural Disaster Assistance and Emergency Post-Conflict Assistance (IMF 2018d). a low-access (37.5% of quota annually and 75% of quota cumulatively) facility without ex ante or ex post conditionality, but with an implicit requirement to cooperate with the IMF (IMF 2018d).

SBA, the IMF’s legacy credit tool, offers credit tranches to countries with ex post and ex ante commitments, normally over 12 to 18 months and up to 3 years. Countries with existing SBAs drew on them during the COVID-19 pandemic, but the IMF did not enter into many new SBAs (IMF 2018d; IMF 2020d; IMF 2022h). The Extended Fund Facility (EFF), a fund established in 1974 for longer-term assistance to support members’ structural reforms and balance of payment needs, had 13 outstanding counterparties by April 2020; on March 25, 2020, Jordan became the only member to initiate a new EFF arrangement during the COVID-19 crisis (IMF 2020d). (The PLL could also be used for immediate funding needs, despite the precautionary use implied by its name.)

Chile was the only IMF member to enter an SLL arrangement. In addition to the USD 3.5 billion committed through the SLL, the Chilean central bank had access to USD 1.3 million through a regional financing arrangement—the Fondo Latinoamericano de Reservas—as well as access to US dollar liquidity through the Federal Reserve’s FIMA repo facility and a USD 8 billion renminbi swap line with the People’s Bank of China (BCC 2022b; IMF 2022b). The BCC never drew upon any of these liquidity arrangements.

The SLL was authorized under the IMF’s Articles of Agreement (Articles), which allowed for its swap-like structure, established the conditionality and surveillance attached to the facility, the demonstrated need for the facility, and defined the nature of a balance-of-payments problem. 

The Articles grant the IMF broad power for overseeing the international monetary system (IMF 2010; IMF 2021a). According to the IMF, ensuring a stable international monetary order requires, inter alia, monitoring the arrangements under which international reserves are held.^FNThe three other constitutive elements under this relatively broad objective on international monetary stability are: rules governing international exchange arrangements between countries and foreign exchange rates; rules governing payments and transfers for international transactions between countries; and rules governing the regulation of international capital movements (IMF 2010). This includes any arrangement by which IMF members access liquidity through the IMF or through other official currency swap arrangements (IMF 2010).^FNThe IMF is forbidden from transacting in gold unless authorized by an 85% vote (IMF 2018d).

The IMF’s Articles require that the Fund use its resources on a conditional basis but grants the IMF flexibility in designing and implementing this conditionality (IMF 2010).

In contrast with long-standing IMF tools such as the SBA (launched in June 1952), which include phased purchases and ex post monitoring, many of the IMF’s post-GFC tools—the SLL, FCL, and PLL, among them—require only ­ex ante conditionality (IMF 2009; IMF 2010).^FNEx ante conditionality was used in short-duration programs during the IMF’s early years, but the SBA tool, one of the IMF’s oldest, is known for its ex post conditionality (IMF 2009; IMF 2010). In ex ante conditionality, IMF staff could determine a participant’s eligibility based on policies implemented in the period preceding the arrangement and use this precedence to infer the reliability of the participant’s future policy commitments, and occasionally check in to confirm policy commitments (IMF 2010).

This conditionality is authorized by Article V, Section 3(a), which requires the IMF to adopt policies that will both assist members to resolve their balance-of-payments issues while also safeguarding the Fund’s general resources (IMF 2009; IMF 2021a). A primary purpose of conditionality and the usual performance criteria included in arrangements is to meet the IMF’s requirement that its facilities (and its conditionality terms) assist IMF members in solving their problems without impairing national or international prosperity (IMF 2009). 

Recipients of an SLL arrangement agreed to enter into (or retain, if already entered into) the IMF’s regular Article IV surveillance process (IMF 2021a Art. VIII, Sec. 7). The Articles generally recommend a repurchase period of three to five years for IMF facilities, but the IMF’s executive board of directors may authorize longer or shorter adjustment periods to address special balance-of-payments problems. The SLL offered a renewable 12-month repurchase period (IMF n.d.b). Repurchase periods could be changed with an 85% vote of the IMF’s executive board of directors (IMF 2001).

Unique among the IMF’s facilities, the SLL arrangement could be signed independently by a central bank, without the co-signature of the finance ministry, provided that IMF staff could separately secure policy commitments from the recipient’s finance ministry (IMF 2020a).

The IMF’s board of governors has the power to approve and cancel SLL arrangements, however, the board of governors has functionally delegated this power to the board of executive directors. The board of governors is composed of one representative from every IMF member country (normally, this representative is the central bank governor or finance minister); thus, it is a large body and has delegated most of its powers to the executive board, which conducts most of the IMF’s business under the supervision and oversight of the board of governors. In 2020 the executive board consisted of 24 executive directors (see Figure 6 for a summary of the IMF’s governance structure) (IMF 2021a, Art. XII, Sec. 3; Lamdany and Martinez-Diaz 2009).^FNThe board of governors meets once a year for a few hours (Lamdany and Martinez-Diaz 2009). The executive board’s voting powers are determined by members’ quotas.

The International Monetary and Financial Committee (IMFC), which is composed of 24 governors, meets twice a year and advises the board of governors on changes to the Articles or supervision of the international financial system (Lamdany and Martinez-Diaz 2009).

Source: Lamdany and Martinez-Diaz 2009.

As with any other facility, the executive board could decide at any time to terminate the SLL by a simple majority of the votes cast, if, for example, the board determined the facility was not serving its purpose or adversely affecting the Fund’s resources (IMF 2020a).

Article XII, Section 7(a) requires the IMF to publish quarterly financial statements, including from its lending facilities, as well as an annual report containing an audited statement of its accounts and the bylaws, rules, and regulations, which set out procedures for the conduct and oversight of its audit function. Following the annual audit, the report is passed by the external audit firm through the managing director and the executive board to the board of governors for approval (IMF 2018d, 155; IMF 2021a).

The IMF’s executive board made the final decisions on a member’s qualification and access to the SLL (IMF 2020a). IMF members elect the executive board, which consists of 24 executive directors who represent all 190 members,^FNThe seven countries entitled to a sole representative (or one executive director each) are: the United States, China, Japan, Germany, the United Kingdom, France, and Saudi Arabia. At the time Chile engaged the IMF, it was represented by Director Sergio Chodos, who also represented Argentina, Bolivia, Paraguay, Peru, and Uruguay (IMF 2020f). Director Chodos’s vote constituted 1.6% of the total voting power of the executive board, with Chile’s individual voting power representing 23.6% of his vote (IMF 2024b).with the managing director acting as chairman (IMF 2021a, Art. XII, Sec. 3).

The IMF staff administered the SLL, first extending an offer of an SLL arrangement to member countries that may qualify. The country would then engage in confidential negotiations with the IMF to request an SLL arrangement, submitting a letter of intent that included a proposed policy response to meet its balance-of-payments need (IMF 2020a; IMF 2022a). Once the IMF executive board granted its conditional approval and offer, the member had two weeks to accept the offer and confirm its participation in the arrangement. The IMF stated that this period of consideration was designed to protect the IMF against a significant change in the economic conditions within the recipient country (IMF 2020a).^FNThis timeline was slightly faster than the FCL, but generally followed the process for “exceptional access” facilities, which were arranged in under a month (IMF 2018a). Once the SLL arrangement had been accepted, the member could draw on the committed credit line at any time. Drawings under the SLL were not subject to additional approval by the IMF’s executive board because they had already received board approval.

For any financial dealing with the IMF, a member must designate two parties: a fiscal agent for all financial negotiations (normally a finance ministry, central bank, official monetary agency, stabilization fund, or similar agency) and a depository for GRA currencies and reserve assets (this can only be the central bank or, if the member has no central bank, an IMF-approved commercial bank). This designated depository maintains two separate accounts: IMF No. 1 Account, for financial transactions, and IMF No. 2 Account, for IMF-related administrative expenses. The member guarantees all IMF assets held at the depository from losses (IMF 2018d). The party ultimately responsible for repaying the IMF was the recipient member, not an individual agency associated with the member (IMF 2020a).

Most IMF arrangements include some form of conditionality. For GRA facilities, this took the form of commitments to enact or maintain policies to resolve the balance-of-payments crisis, which the member outlined in its letter of intent to engage in the SLL. The letter of intent was required to be signed by parties

• Affiliated with the agency endowed with the domestic legal authority to engage in fiscal and monetary policy commitments; and
• Responsible for the subsequent implementation of these policies (see Key Design Decision No. 14, Other Restrictions for more details).

Typically, a member’s ministry of finance and central bank both would sign under this standard. However, cognizant that a finance ministry’s signature might be stigmatized, the IMF permitted central banks to be the sole signatory, so long as they met these criteria and have the requisite legal authorities. However, in such a case the central bank would need to confirm that it could liaise with fiscal authorities to achieve the policy commitments. IMF staff would also communicate bilaterally with the finance ministry to confirm these commitments (IMF 2020a). Chile’s central bank and finance ministry both signed the SLL agreement in May 2022.

The SLL was structured as a special revolving credit facility drawing from the GRA (IMF 2020a).^FNBesides the GRA, the IMF’s General Department holds resources in the Special Disbursement Account (SDA) and the Investment Account (IMF 2018d). The GRA is a pool of currencies and reserve assets comprised of IMF members’ quotas (i.e., size-indexed capital subscriptions). Facilities that draw on the GRA functionally extend loans, but the IMF does not consider this activity to be “lending” technically or legally; rather, GRA facilities involve the purchase and repurchase of currencies from the IMF, similar to a swap arrangement, with interest charged on outstanding purchases. Indeed, the IMF does not characterize itself as a lending institution, but as a repository for its members’ currencies and a portion of their foreign exchange reserves (IMF 2018d).

The IMF extended financing under the SLL in a process resembling a central bank swap arrangement, selling its currency holdings and SDRs to borrowers in exchange for their domestic currency (IMF 2018d). A member could draw on an approved SLL at any time, and multiple times, during the facility’s 12-month period, subject to the approved access level (IMF 2022a) by purchasing either SDRs or the currency of another member^FNIn this case, the purchase could exceed the member’s quota (IMF 2018d). in exchange for an equivalent amount (in SDR terms) of its currency. At the end of the draw period, the member would reverse the transaction by repurchasing its currency held by the IMF by exchanging SDRs or another currency. Not all currencies could be used: only those members included on the IMF’s Financial Transaction Plan (FTP), a select list of countries with strong external positions, had currencies the IMF deemed “usable” and widely traded in major markets. Since 2016, borrowers had to finance IMF transactions with SDRs, the US dollar, euro, Japanese yen, Chinese renminbi, and British pound sterling (IMF 2018d).

In addition to the initial IMF policy paper explaining the design and terms of the SLL, in April 2020, then-Deputy Managing Director Geoffrey Okamoto published an op-ed in support of the SLL as a tool to address short-term liquidity shortages in emerging markets stemming from the COVID-19 crisis (Okamoto 2020).

Following a participant’s written acceptance of the offer for an SLL arrangement, the IMF will publish a press release on the date the SLL arrangement goes into effect. In addition, the participant could request that the IMF issue a press release stating the IMF executive board’s conditional approval of the arrangement. A member might elect to do this if they were concerned about market-sensitive leaks or misinformation regarding the offer. The IMF stated that such a press release would not prejudge the recipient’s decision whether to purchase any of the funds the IMF committed to under the SLL arrangement (IMF 2020a).

A staff report assessing the country’s eligibility, including the borrowing authorities’ written communication, is published shortly thereafter. Qualification assessments for countries the IMF turned down for SLL access were confidential (IMF 2020a). On May 20, 2022, the IMF published both a press release announcing Chile’s SLL arrangement and an interview with BCC Governor Rosanna Costa detailing Chile’s fundamentals and eligibility for the SLL (IMF 2022a; IMF 2022b).

The IMF also published the IMF directors’ deliberations about the SLS, the predecessor to the SLL that ultimately failed to gain approval in 2017. These deliberations resulted from a long-running discussion about the adequacy of the “global financial safety net,” a report the IMF published in 2016. The IMF characterized the SLL as a tool designed to enhance the global financial safety net, which it defined as the world’s aggregate stock of available funds from FX reserves, bilateral swap arrangements, regional financing arrangements, the IMF, and market-based instruments (IMF 2016; IMF 2020a).

Chile issued press releases upon its exit from the FCL and enrollment in the SLL and, three months later, its subsequent return to the FCL, as well as an FAQ document explaining its decisions (BCC 2022a; BCC 2022b; BCC 2022c).  Chile exited the SLL in 2022 and transitioned to the FCL, citing the FCL’s higher access limits and broader coverage of balance-of-payments risks as better suited to address the significant external vulnerabilities it faced, particularly in the aftermath of the COVID-19 pandemic (IMF 2023b).

The IMF intended the SLL for emerging market economies experiencing balance-of-payments pressures and demonstrating a strong record of effective policy responses to those pressures in the past (IMF 2020a). Eligibility for any of the IMF’s GRA operations is limited to members the IMF considers to be in a strong balance-of-payments and reserves position (IMF 2018d).^FNThe IMF maintains a list of such members, the FTP, which is reviewed on a quarterly basis (IMF 2018d).

Qualification criteria for the SLL resembled that of other IMF facilities and was identical to the FCL, which facilitated members’ transition between these two facilities (IMF 2022a). To qualify for either facility, a member had to demonstrate “very strong policies” capable of addressing potential short-term, moderate capital account pressures arising from external developments (IMF 2020a). To determine eligibility for the SLL, FCL, and PLL, the IMF evaluated members’ policies based on nine criteria (see Figure 7).

The SLL was based in part on a 2017 proposal for a swap-like revolving credit line called Short-Term Liquidity Swap. The SLS, along with the FCL and PLL, were born of an IMF study into global funding conditions among “systemic” and “gatekeeper” economies (IMF 2016; IMF 2020a).^FNThe IMF studied the “global financial safety net,” comprising international reserves, central bank bilateral swap arrangements, regional financing arrangements, IMF resources, and market-based instruments (IMF 2016). The IMF defines systemic economies as those with significant contributions to global markets via finance or trade. Gatekeeper economies are those with a propensity to transmit trade or financial shocks to other countries and precipitate crisis spillovers.^FNAs of 2016, gatekeeper emerging market countries included: Brazil, China, Panama, South Africa, and Turkey (IMF 2016). The IMF determined that both types of economies may exhibit

• Inadequate predictability and reliability around central bank swap arrangements and regional financing arrangements; and
• High financial costs (or reserve accumulation) or political costs (or stigma associated with IMF financing) (IMF 2016).

Chile did not appear in the IMF’s classification of systemic and gatekeeper economies.^FNChile joined the IMF on December 31, 1945 (IMF 2023a). Nevertheless, the IMF offered the SLL to Chile based on its strong policy response to the COVID-19 pandemic, noting the country’s improved liquidity condition from international reserves purchases, macroeconomic stability, fiscal sustainability, and strong policy reputation (IMF 2022a). Chile had already qualified for the FCL, which it initially entered into on May 29, 2020, and to which it returned on August 29, 2022, two months after entering into the SLL arrangement (BCC 2022b; IMF 2020c).

For the purposes of determining the scope of the SLL’s impact on the Fund’s resources, the IMF considered all countries with strong policy records, excepting reserve currency issuers (or eurozone countries with access to reserve currency-issuing central banks) and countries with standing swap agreements with the Federal Reserve as potential SLL borrowers (IMF 2020a). (Chile’s access to the Federal Reserve’s FIMA facility was not considered a “standing” arrangement since it carried an expiration date at the time. The Fed has since converted it to a standing facility.)

Governance of the Borrower

The IMF has attached conditionality to its lending since its inception, a legacy adopted from the other international nonstate lending organizations that preceded it (Martin 2022). For the Fund’s GRA facilities, this conditionality takes two forms: ex ante (before an arrangement was approved), usually in the form of an evaluation of the member’s policy track record, and ex post (after a member activated the facility), which normally involved monitoring and surveillance of the policy response for example through the Article IV review process. The SLL was only available to members with strong fundamentals—in other words, the member state had passed an ex ante evaluation—so were not subject to ex post conditionality.^FNHowever, SLL participants were retained or placed on the annual cycle of Article IV consultations (IMF 2020a). The member had the primary responsibility for designing and implementing this policy response, which it was required to detail in its SLL letter of intent before access to the facility was approved (IMF 2018d, 32).

Once the SLL arrangement took effect, the recipient country could draw up to 145% (upgraded to 200% in 2023) of their IMF quota during the 12-month SLL arrangement (IMF 2020a). The IMF assigns each member a maximum financial commitment, or quota, based on the member’s relative position in the world economy. The member pays a capital subscription to the IMF equal to this quota—25% in SDR, or currencies of other strong IMF members, and 75% in the member’s own currency. Quotas are the primary source of the IMF’s financial base, enabling the IMF to engage in GRA lending. They also determine the distribution of voting power among IMF members, a country’s representation on the IMF executive board, its access to IMF resources, and its share in SDR allocation, with the IMF typically reviewing quotas every five years (IMF 2023c; Ramlogan and Fritz-Krockow 2007).

This limit applies to all members borrowing under GRA programs, and any member’s total GRA borrowing cannot exceed 435% of quota cumulatively, net of scheduled repurchase obligations. Access to the GRA above these limits is subject to the IMF’s exceptional access policy—a framework that permits countries facing exceptional balance-of-payments needs to borrow beyond standard limits if they meet certain criteria for debt sustainability, economic reform, and prospects for market access (IMF 2024a).

Chile accepted the offer for the SLL in May 2022 for the full 145% of its quota, amounting to USD 3.5 billion (IMF 2022a). Chile did not draw any amounts under the SLL arrangement before terminating it.

In 2020, Chile’s quota, paid in Chilean pesos, was equivalent to SDR 1.7 billion, of which the IMF held SDR 1.3 billion (or 74.8%) in Chilean pesos (IMF n.d.d; IMF 2021c).

Potential participants confidentially consulted with the IMF, which assessed the participant’s qualification, the appropriate level of SLL access, and whether another IMF facility would be more appropriate; if the candidate qualified; the IMF summarized these deliberations in a staff report. On the basis of the report’s contents, the IMF executive board approved the extension of the offer, contingent upon the participant’s written acceptance of the offer within two weeks of notification. This offer required the participant’s response (a letter of intent) to commit to maintaining “very strong economic policies” and to respond to shocks that arise. The arrangement took effect once the IMF confirmed receipt of the signed written acceptance of the conditional offer. The IMF published a press release announcing the details of the SLL arrangement and the staff report (IMF 2020a).

A member could purchase funds under an SLL arrangement without further approval by the IMF staff (except for administrative processing approvals) but the executive board would be informed of all such purchases. The executive board and staff would not challenge an SLL participant’s characterization of their need for SLL funds, but the IMF expected the member’s drawings would be commensurate with its actual balance-of-payments need at the time of the member’s purchase (see the Key Design Decision No. 3, Legal Authority, for details) (IMF 2020a).

The process for participating in an SLL arrangement mostly resembled the process for accessing the FCL, except the informal IMF board meetings required for FCL arrangements were not required for SLL arrangements (IMF 2020a).

The IMF offers several “precautionary” facilities, including the SLL, FCL, and PLL. Although members may enter any of these three arrangements by communicating the potential for a balance-of-payments need, Article V, Section 3(b) states that a member can only make a purchase from the committed funds if the country represents that it is experiencing an actual balance-of-payments need, and only up to the amount it represents as necessary to meet that need. The IMF could not challenge this “need” ex ante, but if the arrangement was drawn upon and the Fund found in an ex post evaluation that the conditions were not met, it could take “remedial action.”^FNThis conditionality is also true of reserve tranche purchases (IMF 2018d). The IMF intends such a need to mean one affecting the balance-of-payments position of the member, its foreign reserve position, and developments in those reserves, though the IMF’s determination of “need” could be met by any one of these conditions (IMF 2018d; IMF 2021a, Art. V, Sec. 3[b]).

In assigning the country’s central bank as the sole depository for SLL funds, the IMF expected that funds drawn from the facility would be used as international reserves—that is, in support of fiscal policies, but not directly used for fiscal measures (BCC 2022c). Chile remains the only country to sign an SLL agreement, but never drew upon the line (IMF 2023b).

Both the SLL and FCL are designed for countries with strong policy frameworks and fundamentals but serve different purposes, reflected in their repurchase periods. The SLL, intended to address moderate, short-term balance-of-payments needs, requires repurchases within 12 months (IMF n.d.b). In contrast, the FCL, which provides a safety net for sustained financing needs, allows for a longer repurchase period of three to five years, accommodating medium-term external vulnerabilities (IMF n.d.a).

The IMF charged a nonrefundable commitment fee at the beginning of the arrangement (8 bps), a service charge (21 bps), a “normal rate of charge” (SDR rate a fixed margin of 100 bps), and a “normal schedule” for level-based surcharges (in other words, surcharges based on access and duration; see Figure 4 for examples and Figure 8 for a time series of the SDR interest rate). Funds accessed through the SLL did not count towards time-based surcharges (IMF 2020a).

Note: Dotted line indicates approximate launch date of the SLL.

IMF members maintained a reserve tranche position in the IMF—the “facility of first resort"—and SLL purchases did not affect this balance; rather, a member’s purchases through the SLL “floated” against that member’s reserve tranche (IMF 2018d, 42; IMF 2020a).^FNThe IMF directed members to their reserve tranches first because these reserves were convertible into SDRs (or other freely usable currencies) on demand and were considered part of the country’s own foreign exchange reserves. Approval of an SLL arrangement did not mean the recipient had to draw on the swap line, and Chile did not draw on its arrangement. A recipient central bank would only be required to record a liability against the IMF once it drew under the SLL arrangement (BCC 2022c). This liability would be denominated in SDR (IMF 2018d).

Likewise, IMF borrowing has generally been denominated in SDRs (or the currencies that make up the SDR basket in proportion to their weight in that basket) to avoid exchange risks (IMF 2018d). The swap-like approach to the IMF’s lending activity may alter the composition of the IMF’s resources but does not affect its overall size. An increase in loans outstanding reduces the IMF’s holdings of usable currencies and increases the IMF’s holdings of the currencies of the borrowing members.

At the time the SLL was announced, the IMF’s one-year forward commitment capacity (or FCC, the amount of resources available for new lending through the GRA over the next 12 months) stood at USD 265 billion (of a total USD 471 billion of total resources available to the IMF across all accounts) (IMF 2018d; IMF 2020d). This consisted entirely of quota resources from most members; the Fund did not have to supplement these resources with borrowing (IMF 2020a).^FNQuota resources were contributed by members included on the IMF’s FTP, a select list of countries with strong external positions, which had currencies the IMF deemed “usable” (IMF 2018d). The IMF borrows through New Arrangements to Borrow (NAB) or bilateral borrowings. Although it had uncommitted resources under the NAB—for example, Chile had committed USD 31.1 million to the NAB in the fiscal year ending December 31, 2020—it did not use them (BCC 2020).

The SLL exposed the IMF to risks similar to the FCL and PLL. Unlike other IMF nonconcessional lending arrangements that define access on a flow basis (e.g., credit tranches through an SBA), access to the SLL was defined as a limit on the stock of IMF credit committed (or outstanding), up to a maximum of 145% of the country’s quota (IMF 2020a).

The IMF’s risk management framework centers on the credit risk of its lending activity. As global lender of last resort, the IMF’s lending is countercyclical—it often lends into a crisis as market-based funding sources pull back. Thus, the Fund is exposed not only to the risk that its borrowers will not make the repurchases they have committed to, but also risks owing to the concentration and correlation of its lending activity.^FNThe IMF is limited in its ability to use its Investment Account to diversify away the credit risk inherent in the activity of GRA and PRGT accounts, which are held separately in the General Department (IMF 2018d; IMF 2021a Art. XII, Sec. 6(f)). The Investment Account is comprised of two accounts whose purposes are to (1) generate returns in excess of the SDR interest rate and (2) generate a long-term real return of 3% (IMF 2018d, 170). To mitigate these credit risks, the IMF places limits on facility access—level of access, as well as duration and frequency—and imposes conditionality, including pre-program evaluation of macroeconomic fundamentals (ex ante conditionality) and post-program monitoring and surveillance (ex post conditionality) (IMF 2018d).^FNThe IMF executive board gives additional scrutiny to those members whose proposed access exceeds 145% of their quota annually or 435% cumulatively (net of scheduled repurchases)—in other words, for the PLL and FCL. The IMF also maintains a prudential balance of 20% of the quotas of members who are engaged in IMF arrangements (IMF 2018d).

The IMF is not exposed to significant interest rate risk because the same floating interest rate charged to borrowers at the IMF is equal to the rate of remuneration paid by the IMF to its creditors. This rate is directly linked to the SDR interest rate. The IMF also does not face exchange rate risks on its GRA lending. Pursuant to its Articles of Agreement, IMF members hold the borrowed funds in SDRs, and any variance in the member’s currency against the SDR must be settled at the end of the financial year (or upon request by the IMF or the member) (IMF 2018d; IMF 2021a, Art. XX).

The IMF enjoys preferred creditor status owing to its role as global lender of last resort and its inability to legally restructure the claims of its members. The practical implication of this status is that creditors exclude the IMF from any sovereign debt restructurings and voluntarily exercise forbearance, while unsecured creditors do not subordinate their claims to those of the IMF (IMF 2018d).

The SLL drew on the IMF’s GRA, which is funded by members’ quotas and supplemented on a temporary basis with New Arrangements to Borrow (NAB)—a set of credit arrangements among member countries designed to provide additional funds to the IMF—when needed (IMF 2018d; IMF 2020a).^FNNAB had regularly exceeded 100% of quota resources between 2011 and 2016, when quotas were recalculated to appropriately fund the FCC without NAB. For example, see (IMF 2021d).GRA currencies and reserve assets are held at members’ depositories (IMF 2018d). Only the BCC could transfer resources through the FCL and SLL, and it was responsible for managing them as part of its international reserves; the IMF forbade borrowers from using the committed funds for direct fiscal spending (BCC 2022c).

Members were restricted from engaging multiple IMF facilities at once. Requesting an SLL arrangement would require cancelling any existing FCL arrangement, and vice versa (IMF 2020a). Likewise, a country whose external position was strong enough to qualify it for the SLL was likely also eligible to be included in the FTP—a framework that governs a country’s financial transactions with the IMF, including borrowing and repurchasing.

The SLL was designed to fill a gap in the IMF’s lending toolkit: The SLL was available for those members whose economies were strong enough to qualify them for the FCL, but who only needed the amount of credit offered by the PLL (which served countries with weaker economic fundamentals). Chile switched from the SLL to the FCL (with its larger credit allotments and longer maturity) in response to persistent inflationary pressures in 2022 (IMF 2022c).

When the SLL’s predecessor, the SLS, was proposed in 2017, some IMF directors considered making it higher access to better serve members with large liquidity needs. During these deliberations, IMF directors contemplated eliminating the PLL given its low use; between 2020 and 2022, Panama was the only member to engage in a PLL arrangement (100% of quota) but never drew upon it (IMF 2017b; IMF 2020d; IMF 2021d).

On August 23, 2021, the IMF also allocated USD 650 billion worth of SDRs, the largest allotment in the Fund’s history by a treble factor (IMF 2021b).^FNFor more information on the 2021 SDR allocation, see Arnold (2024). In addition to supplementing foreign reserves and paying IMF debts, SDRs can be exchanged for IMF member nations’ freely usable currencies. Thus, the SDR serves as an indirect means of obtaining any SDR basket currency from an IMF member nation. There are currently five SDR basket currencies, all global reserve currencies—the US dollar, euro, Japanese yen, Chinese renminbi, and British pound sterling (IMF 2022e).

The SLL was established for a seven-year period, with a formal review planned for 2025, at which point the executive board of the IMF would determine whether a renewal was necessary (IMF 2020a). As of November 2024, the SLL is still in operation.

A 2023 IMF review of its precautionary toolkit found that the SLL is an effective tool for quick credit access but its limited use stemmed from factors like a low access limit (145% of quota) and some qualifying countries may not have been fully aware of its benefits. To improve its effectiveness, the IMF proposed raising the SLL’s access limit to 200% of quota and allowing concurrent use with the FCL, enabling countries to address both moderate and tail risks. These changes aim to enhance the SLL’s flexibility and effectiveness while increasing combined access to up to 400% of quota (IMF 2023b).