IMF’s Rapid Financing Instrument (RFI) explained

Finance Minister Ali Sabry during his meeting with the International Monetary Fund Managing Director Kristalina Georgieva on Monday requested Sri Lanka’s need for urgent support via the IMF’s Rapid Financing Instrument (RFI). It was indicated by the IMF that Sri Lanka does not meet the criteria for a RFI. However, India, had subsequently made representations for a RFI for Sri Lanka as well and IMF is likely to consider this request given the crisis situation in Sri Lanka. Here we reproduce what is IMF’s RFI.

The Rapid Financing Instrument (RFI) provides rapid financial assistance, which is available to all member countries facing an urgent balance of payments need. The RFI was created as part of a broader reform to make the IMF’s financial support more flexible to address the diverse needs of member countries. The RFI replaced the IMF’s previous emergency assistance policy and can be used in a wide range of circumstances.

The RFI provides rapid and low-access financial assistance to member countries facing an urgent balance of payments (BoP) need, without the need to have a full-fledged program in place. It can provide support to meet a broad range of urgent needs, including those arising from commodity price shocks, natural disasters, conflict and post-conflict situations, and emergencies resulting from fragility. As a single, flexible mechanism with a broad coverage, the RFI replaced the IMF’s previous policy that covered Emergency Natural Disaster Assistance (ENDA) and Emergency Post-Conflict Assistance (EPCA).

The RFI is available to all member countries, although member countries eligible for the Poverty Reduction and Growth Trust are more likely to use the similar concessional Rapid Credit Facility (RCF). The RFI is designed for situations where a full-fledged economic program is either not necessary or not feasible in the face of a present BoP need that, if not addressed urgently, would result in immediate and severe economic disruption. The former situation may arise when the shock is transitory and limited in nature, while the latter may arise when the member’s policy design or implementation capacity is limited, including due to the urgent nature of the balance of payments need or to fragilities. There are two windows under the RFI: (i) a regular window, for situations described above, with access limits of 50% of quota in any 12-month period and 100 % of quota on a cumulative basis, and (ii) a Large Natural Disaster (LND) window, for cases where the damage suffered as a result of a natural disaster is assessed to be 20 % of GDP or more, with access limits of 80% of quota in any 12-month period and 133.33% of quota on a cumulative basis.

In response to members’ large and urgent COVID-19-related financing needs, access limits under these windows were increased temporarily until 31 December 2021. Since 1 January the annual access limits for the regular and LND windows have reverted to pre-pandemic levels of 50 and 80 % of quota respectively. However, the cumulative access limits for both windows will continue to remain at 150% and 183.33% of quota respectively until 30 June 2023. The access limits under the large natural disaster window remain unchanged at 80% of quota per year and 133.33% of quota on a cumulative basis, for use in cases where the damage suffered is assessed to be 20% of GDP or more, and the member’s existing and prospective policies are sufficiently strong to address the natural disaster shock. The level of access in individual cases depends on the country’s balance of payments need, capacity to repay, the member’s outstanding Fund credit and its record of using Fund resources in the past. Financial assistance provided under the RFI is subject to the same financing terms as the Flexible Credit Line (FCL), the Precautionary and Liquidity Line (PLL) and Stand-By Arrangements (SBA) and should be repaid within 3¼ to 5 years.

Financial assistance under the RFI is provided in the form of outright purchases without the need for a full-fledged program or reviews. A member country requesting RFI assistance is required to cooperate with the IMF to make efforts to solve its balance of payments difficulties and to describe the general economic policies that it proposes to follow. Prior actions may be required where warranted.

Broader IMF engagement

While financing under the RFI is often a one-off purchase in the case of an urgent balance of payments need of limited duration, there is scope for repeated use. A repeated use of the RFI within any three-year period is possible if the BoP need is caused primarily by an exogenous shock, or the country has established a track record of adequate macroeconomic policies, including through a staff monitored program, prior to the request.

As under the RCF, in addition to the provision of emergency assistance under the RFI, the Fund may also provide technical assistance to build the country’s capacity to implement comprehensive macroeconomic policies. Areas of focus may include building statistical capacity and establishing and organising fiscal, monetary, and exchange institutions to help build tax and government expenditure capacity, payment, credit, and foreign exchange operations.