international-monetary-fund-295x300A few weeks back, the IMF approved a two-year extension to the zero interest rates charged on loans to low-income countries – a category that most countries in Africa ascribe to. The extension is part of a wider strategy to support concessional lending to poorer countries as they combat the effects of the global economic crisis. The report explained that, following further weakening of global growth and low-income countries’ declining ability to weather the crisis; the IMF has approved a second extension to the exceptional interest waiver on loans under its Poverty Reduction and Growth Trust (PRGT). In addition, the IMF announced a postponement by one year, to end 2014, of the next review of PRGT interest rates.

“The IMF Executive Board decision to keep interest rates at zero for all concessional loans for a further two years is testament to the Fund’s continued support for low-income countries since the global economic crisis hit in 2009,” said IMF Managing Director Christine Lagarde.

The zero interest-rate extension follows other recent steps by the IMF to bolster lending to poorer countries that include increased resources, higher borrowing limits, and more flexible terms. These moves stem from the major overhaul of the Fund’s support programs for low-income countries in mid-2009, which created a new framework for loans to the world’s poorest nations and initially set zero interest rates on concessional loans through 2011.

After the global financial crisis first erupted in 2008, the IMF stepped up its lending to low-income countries to combat the impact of the ensuing recession. Initially, poorer countries succeeded in adjusting policies to offset the worst effects of the crisis. But this success was partially reversed in 2011, with many low-income countries having limited fiscal space and running current account deficits that were higher than pre-crisis levels.

Low-income countries face the slow pace of the global recovery and increased volatility in food and fuel prices. A recent review of low-income countries facilities noted a strong and continuous increase in demand for fund support. Furthermore, empirical evidence shows that over the long term, IMF backed programs help raise growth, reduce poverty, and boost resilience to shocks in low-income economies.

In response to the increasing financial needs of low-income countries during the global financial crisis, IMF concessional lending increased significantly from $1.2 billion in 2008 to $3.8 billion in 2009, and $1.8 billion in 2010 to $1.9 billion in 2011. Following the onset of the global financial crisis, low-income countries received exceptional relief of all interest payments on outstanding concessional loans due to the IMF through the end of 2011—effectively, an interest rate of zero on these loans for this period. The period was later extended to end-2012. Now low-income countries will receive exceptional relief through end-2014 on all interest payments due to the IMF under its concessional lending instruments.

Gold sales profits

An IMF report released in September 2012 warned that the sharp drop in PRGT financing capacity after 2014 needed to be addressed for the IMF to maintain its capacity to help low-income countries in the future and support their efforts to promote strong and sustainable growth. The report also noted that IMF support helped low-income countries navigate the crisis and promote longer-term poverty reduction and growth, but that these countries remain exposed to global risks and volatility.

In response, the IMF Board in February 2012 approved the distribution of about $1.1 billion from windfall gold sales profits to its members in order to boost its concessional lending capacity for low-income countries. In September 2012, the Board approved a decision that the remaining gold sales windfall profits of around $2.7 billion be distributed as part of a strategy to ensure the longer-term sustainability of the PRGT.

The report was first released by IMF