The Arab states instituted the Arab Monetary Fund (AMF) in their desire to lay the monetary foundation of Arab economic integration and to accelerate the process of economic development in all Arab countries. The Fund’s Articles of Agreement place its lending activity at the top of the means available for its use in order to achieve its objectives. The Fund also supports reform programs by providing technical assistance to help member countries formulate policies and reforms to achieve desired goals.
In this regard, the Articles of Agreement defined with precision the nature of the lending activity, which it entrusted the Fund with the responsibility of conducting. In effect, Article Four states that “correcting disequilibria in the balance of payments of member states constitutes one of the objectives to the achievement of which the Fund should aim at contributing to”. The agreement thus distinctly differentiates the Fund from other joint Arab financial institutions with regard to this specific area. It has directed the organization to deal with aspects related to the macroeconomic situation since the disequilibrium in the balance of payments reflects financial and structural imbalances in the macro-economy. Moreover, Article Nine of the Agreement has also empowered the Fund to “adopt, by decision of the Board of Governors, any other measures which may assist in the realization of its goals”.
Since this activity seeks to correct the disequilibrium in the balance of payments of its member states, stabilize their economies and overcome the structural imbalances facing them, in addition to support sectoral reforms such as the reforms in public finance and the financial and banking sectors, it provides a major incentive to the concerned members to reduce the reliance of their system on exchange restrictions and hence to achieve convertibility between their currencies and liberalize trade and payments.
In this context, the Fund lending policy and procedures enunciate a number of fundamental basis and principles, which the Fund must take into consideration in discharging its lending function. Included in these, are the principle of fairness and the equal opportunity of access to Fund’s loans by Arab countries. Another principle relates to the safeguard of the Fund’s ability to maintain its continuity in growth while also striving to achieve the objectives for which it was created, by seeking to strike an optimal balance between the provision of necessary loan financing and the need to strengthen its resources and capabilities. Moreover, the Fund is also required to ensure that the resources it lends are used safely by the borrowing members who must have the ability to meet their obligations towards it. One way in which the Fund does so is through an agreement it reaches with the borrowing member on appropriate adjustment programs in situations where the Agreement so stipulates and through consultations aimed at monitoring the effectiveness of the said programs in alleviating the member’s balance of payments deficit during the loan’s maturity period.
In addition, the Fund endeavors to develop its capacity to continue meeting the financing requirements of its member states by strengthening its financial resources under optimal conditions. To that end, the fund protects, as much as feasible, its resources from exchange rate fluctuations and strengthens its own reserves in order to be able to meet unforeseeable emergencies and to render the terms and conditions of its lending to its members concessionary.
AMF facilities to support reform programs and urgent financing needs
The Fund offers a range of loans and facilities on concessional terms for different maturities. The provision of such facilities involves extensive consultations with country authorities concerned to reach agreement on appropriate policies and actions for economic reform. The Fund loans and facilities are of two main categories.
The first category of AMF facilities aims at addressing balance of payment imbalances of borrowing member countries. They are associated with mainly macroeconomic reforms which are agreed upon between the Fund and a borrowing country. The Fund initiated this type of facilities since the inception of its lending activity in 1978. The second type was introduced later on, and is meant to support sectors and areas that are within the area of Fund’s mandate. This type of loans and facilities was introduced to reflect the Fund’s keenness to respond to economic developments and changing priorities and needs of member countries. With the track record of stabilization and macroeconomic reform policies in Arab countries have been increasingly interested in recent years in adopting structural reforms with a view to improve resource use efficiency to achieve higher, sustainable growth.
The loans and facilities currently offered by the AMF to help address overall balance of payment deficit of member countries include four types of loans that vary in size, terms and maturity, based on the nature and causes of balance of payments disequilibria in eligible member countries:
The Automatic Loan is extended to assist in financing the overall deficit in the balance of payments in an amount not exceeding 75 percent of the member country’s subscription in the Fund’s capital paid in convertible currencies. The loan has a maturity of three years with a grace period of 18 months, and is not conditional on the implementation of an economic reform program provided that the concerned member has no conditional loan outstanding (ordinary and/or extended loan). If, however, the country has ordinary or extended loans outstanding at the time it applies for an automatic loan, and the country has already implemented such a reform program, the AMF, based on an assessment of causes of overall balance of payment deficit, whether the requested loan would be considered an automatic loan, or be tied to ordinary or extended loans, in which case the Automatic Loan would be subjected to terms applied to the outstanding loans, and its amount would be considered an extension to the limit of the conditional loans outstanding.
The Ordinary Loan is extended to an eligible member country when its financing needs exceed 75 percent of its paid subscription in convertible currencies. Generally, this loan is extended up to 100 percent of the member country’s paid subscription in convertible currencies and could be supplemented with an Automatic Loan to reach a maximum of 175 percent. To benefit from this loan, the borrowing member country must agree with the Fund on a stabilization program, covering a period of not less than a year. The policies and measures included in such a program would aim at restoring fiscal equilibrium with a view to reducing balance of payments deficit. The Fund follows up on the implementation of the program. As it is the case with all other conditional loans, the satisfactory implementation of the policies and measures agreed upon is a condition to the disbursement of the loan’s tranches. Each disbursement is repaid within five years from its date of withdrawal and with a grace period of 30 months.
The Extended Loan is provided to an eligible member country with a chronic deficit in its balance of payments resulting from structural imbalances in its economy. The member country is required to agree with the Fund on a structural adjustment program covering a period of not less than two years. The maximum amount of this loan is normally equivalent to 175 percent of the member country’s paid subscription in convertible currencies. It can, however, be supplemented by an Automatic Loan, thereby reaching up to 250 percent of the member country’s paid subscription. Each disbursement is repaid within seven years from its date of withdrawal.
The Compensatory Loan is extended to assist a member country experiencing an unanticipated balance of payments deficit resulting from a shortfall in export earnings of goods and services and/or a sharp increase in the value of agricultural imports due to a poor harvest. This loan’s limit is equivalent to 100 percent of the member’s paid subscription in convertible currencies, and it has a maturity of three years and a grace period of 18 months. The borrowing country must be experiencing a transitory fall in exports or a transitory increase in food imports.
The second category of loans and facilities includes Structural Adjustment Facility for the financial and banking sector and for government finance sector, the Trade Reforms Facility, Oil Facility, Short Term Liquidity Facility, and Small and Medium Enterprises’ Conducive Environment Support Facility.
The Structural Adjustment Facility was introduced in 1998, with a focus initially laid on supporting reforms by borrowing member countries in the financial and banking sector. It was expanded in 2005 to cover support to fiscal reforms. To benefit from the Structural Adjustment Facility, a member country is required to have achieved some progress in macroeconomic stabilization and to agree on the implementation of a reform program monitored by the Fund. Each category of the facility (the financial and the banking sector and the public finance sector) is extended with a maximum limit of 175 percent of the paid-up subscription in convertible currencies. Each tranche is to be repaid in four years from the date of disbursement.
The Trade Reform Facility was established by the AMF Board of Governors in 2007. It aims at assisting member countries to meet finance costs associated with the implementation of trade reforms, thus encouraging them to adopt necessary reforms to facilitate their access to financing from international markets so as to consolidate growth and create productive job opportunities. This facility is extended up to 175 percent of the member’s paid subscription in convertible currencies, provided the borrowing member country agrees with the Fund on a structural reform program that will be monitored by the Fund. Maturity, repayments and disbursements applicable to this facility are the same as those of the SAF in both financial and banking and fiscal sectors.
The Oil Facility was approved by the Board of Governors in April 2007 as a temporary lending mechanism to remain active for five years. This facility went into effect in December 2008. This facility is meant to support member countries affected by the transitory rise in oil and gas imports, with ensuing deterioration in balance of payments position. The oil facility is extended to eligible countries with quick procedures up to 100 percent of a member country’s paid subscription in convertible currencies, without requiring the agreement on a reform program, and up to 200 percent of the paid-up subscription in convertible currencies, with the condition that the eligible member must agree with the Fund on a reform program that is supported by one of the Fund’s ordinary facilities dedicated to support reform programs.
The Short-Term Liquidity Facility was approved by the Fund’s Board of Governors in 2009. It aims at assisting member countries with a track record of structural and economic reforms that face temporary liquidity shortage due to unfavorable developments in global financial markets. The facility is extended promptly and without any prior agreement on a reform program with the eligible borrowing member country. The short-term liquidity facility is extended with a maximum limit of 100 percent of the member’s paid-up subscription in convertible currencies. The disbursement of the facility could be carried out in one or more tranches as requested by the borrowing members. Each payment is settled after six months of disbursement, with possible extension of maturity up to, i.e., eighteen months.
The Small and Medium Enterprise’s Conducive Environment Support Facility was introduced by the Fund in 2016 with a view to supporting reforms in SME’s sector, given the significant role these enterprises play in driving economic growth and creating jobs. This facility is extended with a maximum limit of 100 percent of the member’s paid-up subscription in convertible currencies. Each tranche is to be repaid in four years from the date of disbursement.