IMF loosens loan strings, for now

The International Monetary Fund's new short-term loan facility for emerging economies hit by the financial market meltdown comes with no conditions attached. Once a loan has been approved, the facility will offer large upfront financing to help countries restore confidence and combat financial contagion, the IMF said.

''The short-term liquidity facility (SLF) is designed to help emerging market countries with a track record of sound policies address the fallout from the crisis,'' IMF said in a press release.
 
The IMF seems to have bartered its usual `conditionalities' for `flexibility' in its new lending policy. "Exceptional times call for an exceptional response," said IMF managing director Dominique Strauss-Kahn.

The IMF has already reached outline financing agreements with Iceland, Hungary, and Ukraine, and is in advanced talks with several other countries as the financial market contagion emerging from the US subprime loan crisis spreads to the global financial system.

The SLF will allow the IMF to help its members at a critical time. "Even countries that have excellent track records of implementing strong macroeconomic policies have been caught up in the global financial market crisis. They need support, and the IMF is ready to give it," Strauss-Kahn said.

"The SLF will support the authorities' efforts to reduce the impact of the crisis. Approval of a request for support under the SLF will help members fortify defences against temporary capital account outflows, boost confidence and provide needed policy space," he said. (view video)

There is a real demand for IMF's resources, but there is also a growing recognition that the Fund's traditional facilities may not be the optimal means of addressing short-term balance of payments pressures in every case.

"While existing Fund loan facilities offer flexibility, they are fundamentally used for countries that require both financing and policy adjustment, and not for countries that despite strong initial macroeconomic positions and policies are facing short-term liquidity pressures. This facility addresses that gap in the Fund's toolkit of financial support," Strauss-Kahn said.

With not much lending in recent times, the IMF's liquidity currently also is at historically high levels. But this may change if there are enough takers for SLF.

Strauss-Kahn said the Fund is also prepared to work with others to generate additional resources to make sure that countries have the money they need to restore confidence and maintain stability.

The new facility is part of a wider review of the IMF's financing role in member countries, launched earlier in 2008. In September, the IMF revamped its Exogenous Shocks Facility, which is designed to help low-income countries cope with emergencies caused by events beyond their control.