The International Monetary Fund on Tuesday overhauled the way it lends to member countries in the face of a worsening global economic crisis and created a new line of credit for well-run emerging-market economies.
Senior IMF officials said the move represented a turning point in the way the Fund supports countries and will make it easier for emerging market economies to seek help from the IMF to weather the global downturn.
The new flexible credit line will give countries that meet a set of conditions access to a pool of money they can either tap immediately or keep as a guarantee in case global conditions worsen.
It replaces a short-term liquidity facility, approved by the IMF in October, that attracted no takers because countries said funding was too small and repayment schedules too rigid.
"These reforms represent a significant change in the way the Fund can help its member countries, which is especially needed at this time of global crisis," IMF Managing Director Dominique Strauss-Kahn said in a statement.
"More flexibility in our lending along with streamlined conditionality will help us respond effectively to the various needs of members. This, in turn, will help them to weather the crisis and return to sustainable growth," he added.
News of new IMF lending instruments to help emerging economies helped buoy improved investor sentiment in Latin American stock markets, but did not stop most currencies in the region from weakening.
Goldman Sachs' senior emerging markets economist, Alberto Ramos, said in a research note on Tuesday that the new flexible credit line was a "major improvement" over the more limited short-term liquidity facility.
Ramos said that in Latin America, countries such as Brazil, Chile, Colombia, Mexico and Peru would probably qualify for the IMF credit line, while others like Argentina, Ecuador and Venezuela would not.
The changes in IMF lending come as the global institution projects the world economy will contract this year for the first time since World War Two, by 0.5 to 1.0 per cent, and risks are rising in emerging and developing countries as demand slumps and credit dries up.
Under the changes, the IMF said, once the emerging economies have qualified for the credit line, there would be "no hard cap" on the amount a country could borrow, and repayments would be in three to five years.
IMF First Deputy Managing Director John Lipsky told Reuters Financial Television many countries, even those with good track records, were having a hard time accessing financing, and the new credit line would ensure they are not forced into a serious downturn.
He said changes in lending instruments for low-income countries will be dealt with separately "in coming months."
But the IMF said conditions attached to all IMF programs, including for standby loan arrangements, will be streamlined for borrowers and costs simplified.
Instead of conditions focusing on fixing all problems in an economy, they will now focus on areas that need immediate attention.
"The conditions applied to our traditional standby arrangements will focus on basic aspects of monetary and fiscal policy, and exchange rate policy, to make sure the broad macro-economic framework is appropriate for sustaining positive economic growth," Lipsky said.
In addition, countries will no longer require formal performance waivers should they fail to meet structural reform targets set out in a loan program, the Fund said.
Access to funding under the standby arrangements will be doubled to two times and six times countries' IMF quota, which determines how much they can borrow. Anything above those limits would be provided on a case-by-case basis under so-called exceptional access procedures.
Reza Moghadam, director of the IMF's strategy, policy and review department, said the changes would apply to countries that have existing IMF programs or are negotiating new ones, such as in the case of Romania and Turkey.
He said changes to conditions will apply as of May 1, while increased access to resources would be effective immediately, and a new system for charging countries will be implemented from August 1.
Lipsky said the changes will require additional IMF resources to give member countries confidence the Fund will have sufficient capital to meet their needs.
The Group of 20 developing countries is expected to agree on additional funding for the IMF at a meeting in London on April 2. Lipsky said while a doubling of IMF resources was likely sufficient, it may require more.