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The executive board of the International Monetary Fund (IMF), has reviewed the Fund’s sovereign arrears policies, endorsing main recommendations of the staff paper “Reviews of The Fund’s Sovereign Arrears Policies and Perimeter.”

A statement from the Fund on Tuesday said the review is the last step in a multi-year modernization of the Fund’s legal and policy framework for treatments of sovereign debt in IMF arrangements.

According to the statement, “It adopts incremental but important amendments that aim to support more effective, orderly, and transparent resolution of sovereign debt difficulties in member countries.”

Recognizing the disruptive nature of sovereign arrears for Fund members and the international community at large, the Fund’s legal and policy framework for sovereign debt includes a policy of non-toleration of arrears (NTP) to international financial institutions and official bilateral creditors in specific circumstances, complemented by the policy on Lending Into Arrears (LIA) to private creditors, which was adopted in 1989 and last reviewed in 2002 and the Lending Into Arrears to Official Bilateral Creditors (LIOA) policy adopted in 2015.

The IMF said that in light of the evolution in the creditor landscape—including the emergence of new official bilateral and International Financial Institution creditors and instruments—the Executive Board also endorsed staff’s recommendations on the Fund’s definitions and practices used to categorize claims when applying these arrears policies.

The main changes are in four areas:

For areas that witnessed changes were: The LIA policy has been revised to place greater emphasis on debt transparency, and streamlined by eliminating the reference to a formal negotiating framework.

*The Fund’s existing practice governing lending to members who are not in arrears but seeking a debt restructuring (“preemptive debt restructurings”) is codified into a formal policy, with an emphasis on debt transparency along the lines of the LIA policy.

* While the LIOA policy remains unchanged (given limited experience with its application since its adoption in 2015), the Fund’s definition of an official bilateral claim was updated in light of the recent evolution of the creditor landscape (such as new creditors and new types of instruments).

* The NTP with respect to IFIs has been updated to provide clarity on how new IFIs will be treated.

As is currently the case, the question of whether an IFI should benefit from the NTP will remain a judgment call informed by several factors. In addition to the existing factors—global membership, treatment by the Paris Club, and participation in the HIPC initiative—the Board will also consider whether the institution is a Regional Financing Arrangement and whether the IFI is receiving preferred creditor treatment by the official bilateral creditor community.

For all other IFIs, the NTP would apply in cases when a restructuring involving official creditors is not required, while the LIOA would apply in the remaining cases.

The board agreed that, overall, the Fund’s arrears policies have worked well in enabling the Fund to proceed with providing financing in cases of arrears.

At the same time, they noted that practice in sovereign debt restructuring and the creditor landscape have evolved over the last 20 years and certain updates are in order. Directors agreed that the proposals endorsed today are accurately reflected in the Executive Board understandings in Supplement 2 of the main paper to be issued shortly.

First, Directors agreed that debtors would be expected to share “relevant” information, generally aligned with what the member would be required to share under the Debt Limits Policy.

They noted that this expectation would replace the earlier two-track approach on confidential and non-confidential information. Directors emphasized, however, that decisions on an adequate macroeconomic framework and the design of the financing plan or the adjustment program that could form the basis for the Fund’s lending into arrears will remain in the sole purview of the Fund.

The Directors considered that any terms offered to the creditors by the member should be consistent with the parameters of the Fund-supported program.

They also expected that the debtor should provide clarity on the perimeter of claims that would be subject to the private-sector debt restructuring at the outset of the debt restructuring process.

Directors reiterated their support for the use of flexibility in applying the LIA policy in emergency financing cases, in line with the flexibility provided under the LIOA policy.



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