The International Monetary Fund's (IMF) executive board recently approved the creation of a new facility to help low-income and most middle-income countries deal with longer-term challenges such as climate change and pandemics.

IMF Managing Director Kristalina Georgieva announced the approval of the new trust for resilience and sustainability, and said it would take effect from May 1, with a goal of raising at least $45 billion.

The trust would amplify the impact of last year's $650 billion allocation of the IMF’s special drawing rights (SDRs) by allowing richer members to channel their emergency reserves to allow vulnerable countries to address longer-term challenges that threatened their economic stability.

"This historic decision embodies the spirit of multilateralism," she said in a statement to Reuters. "It shows that when there is the need and there is the will, we can work together to achieve a significant outcome for the benefit of all."

Earlier IMF staff hammered out details of the new facility after it won the backing of the G-20 major economies in October.

G-20 backing

Georgieva won the endorsement of the G-20 major economies for the new trust that will allow rich IMF members to donate their share of newly created emergency reserves to a broader range of countries in need.

G-20 finance officials backed the new trust in their communique and called on the IMF and the World Bank to "collaborate closely" to develop and implement financing under the new trust.

On her part, U.S. Treasury Secretary Janet Yellen also backed efforts to channel the reserves, known as SDRs, and the "rapid establishment" of the new trust.

Lend or donate

The new trust will allow the IMF members to lend or donate their share of the IMF's $650 billion in new SDRs to offer long-term financing to small island states and vulnerable middle-income countries, as well as low-income countries already served by the IMF’s Poverty Reduction and Growth Facility (PRGF). The creation of the trust is intended to address concerns about many low- and middle-income countries that were hit hard by the COVID-19 pandemic, leaving them fewer resources to prepare for and deal with extreme weather events.

Proposed paper

The IMF staff paper forecasted a demand of $30 billion to $50 billion for the new trust over 10 years, assuming income-based eligibility for all 69 countries eligible for the PRGF, 15 small developing states and 55 middle-income countries.

It proposed requiring the new trust applicants to have an existing IMF program with upper credit tranche conditionality, and agree to reforms to strengthen external and domestic stability.

Kevin Gallagher, director of the Global Development Policy Center at Boston University, called the G-20's rapid approval of the new trust a "landmark achievement" that underscored the urgency of the challenges facing countries around the world. However, he said that it would be wrong to require applicants to have an existing IMF program, because it would leave countries such as the Dominican Republic, who were at risk of extreme climate-related events such as hurricanes, without access to aid.

Hitting the target

The IMF chief said she expected advanced economies to reach their target of shifting about $100 billion of the new SDRs allocation to countries in need. She said the fund was also putting in place measures to increase transparency about the use of any SDRs.

When asked about reservations expressed by some critics that the new trust would overlap with the mandate of the World Bank, Georgieva said the fund was working closely with the multilateral development bank as it developed the new trust. She said the IMF's first presentation about the trust was to the board of the World Bank, and a large World Bank team had participated in the staff's presentation to the IMF board.

Cautious members

Some members were cautious. German Chancellor Olaf Scholz called for a "clear delineation" of tasks between the fund and institutions like the World Bank, and said any new trust must be "carefully designed to avoid unintended consequences and drawbacks."

He also said the IMF should act to avert "facility shopping" and any risk to members' ability to repay regular IMF programs, and noted that climate change and pandemic preparedness remained mainly the remit of multilateral development banks.

On his part, Martin Muehleisen, who headed the IMF's strategy division from 2017-2020, cited what he called justified concerns about "a fundamental reorientation" of the fund's agenda and increasing overlap with World Bank. He said the fund's legal mandate was limited to providing short-term balance-of-payments support to help countries preserve financial stability, and it lacked the expertise to advise countries on detailed climate policies.

Climate concern

In an open letter published to coincide with the IMF’s announcement, 17 civil society groups called on the IMF to work with international institutions that have relevant expertise on climate action, such as the United Nations Framework Convention on Climate Change.

"Before implementing the new fund, the IMF should convene a consultative discussion including a broad range of stakeholders to ensure it contributes to a fair recovery that supports climate justice and tackles economic and gender inequalities," said the letter, which was signed by groups including the Bretton Woods Project and the Center for Economic and Policy Research.

Georgieva has made climate action a priority for the IMF since taking up her post as director. The fund published a strategy last year laying out plans for increased climate assistance, which includes boosting the capacity of central banks and supervisory authorities toward addressing climate-related financial risks

The IMF currently offers low-cost and zero-interest-rate financing to help countries deal with short-term challenges, such as capital flight, inflation or high commodities prices, and medium-term fiscal and financial challenges. However, it lacked a facility to help countries manage risk to balance payments posed by longer-term threats, and its PRGF was open only to low-income countries.

The new fund will fill those gaps, offering a broader range of countries affordable financing over extended repayment periods, with a 20-year maturity and a 10-1/2-year grace period. The IMF said it plans to begin lending under the program by October. The funding will be available to low-income and most middle-income countries, including all small developing states, the IMF said. Many of those states were hit particularly hard by the pandemic and its economic impact.

To qualify for lending from the new fund, countries would still need to develop "credible policy and reform measures," have sustainable debt and adequate capacity to repay the IMF, and be part of a concurrent IMF financing or non-financing program, such as its policy-coordination arrangements with Serbia, Rwanda and other countries.

The eligibility criteria were set up to balance creditor and debtor needs, while mitigating financial risks to the fund.

The funding is also expected to serve as a catalyst for additional financing from the private sector, donors and other international financial institutions and there will be close collaboration with the World Bank and other international financial institutions for the success of the new trust.