The PRGT Must Be Replenished, but There Are No Easy Options

The Poverty Reduction and Growth Trust (PRGT), the IMF’s primary vehicle to support low-income countries (LICs), faces a severe financial crunch. There are many ways in which this hole could be plugged to restore the PRGT, but as explained in a new CGD note, there are obstacles or drawbacks to each potential approach. A concerted push is needed, along with a willingness to explore all avenues.

There’s an acute shortage of subsidy resources but replenishing the PRGT will be costly

Subsidy resources allow the PRGT to lend at concessional rates—currently zero percent. Unprecedented levels of lending, four to five times higher than before the pandemic, have seriously depleted subsidy resources (recent blogs highlight this financing need, see here and here). If the PRGT’s resources are not replenished, the PRGT’s lending capacity from 2025 onwards will collapse to well below its pre-pandemic level. And such an enfeebled PRGT, able to lend less than SDR 1 billion a year, would not come close to meeting LICs’ needs, which are much higher post-pandemic and in the continued aftermath of the Russian invasion of Ukraine.

SDR 3.2 billion is needed to plug the hole created by high levels of lending through 2024 and restore the PRGT’s pre-pandemic lending capacity in real terms, about SDR 1.65 billion per year. But this will not be enough. For myriad reasons—including the impact of climate change, high levels of repayments to the PRGT in the next decade, and the need for a greater buffer to address future crises—a much bigger PRGT is needed. Ensuring annual lending capacity is SDR 3.0 billion would cost an additional SDR 6.5 billion. The total financing need—in hard money not loans—is thus about SDR 10 billion.

There are many ways to fill this need but no easy solutions

IMF member countries could provide donations. The IMF has its own resources, including large gold holdings and other reserves that could be tapped. The financing need could also be reduced by adjusting parameters of the PRGT’s financing model. But there are obstacles or drawbacks to each of these options, including possible lengthy delays before funds can be mobilized.

Donations alone will not fill the gap

The total financing need far exceeds countries’ past donations to the PRGT. Given tight budget constraints, it’s unrealistic to expect countries to contribute more than the SDR 3.2 billion that they have so far been asked to pledge—and even this may be a stretch too far. To date there is a shortfall of SDR 0.9 billion from the SDR 2.3 billion that the IMF originally requested in July 2021, and in the interim, high PRGT demand and higher market interest rates added another SDR 2.3 billion to subsidy costs and the fundraising target. (Like a hapless individual walking slowly up a down escalator, donors find themselves being asked to do more now than when they started.)

Gold sales could meet the entire need…  or nothing at all

By selling just 8 percent of its gold, the IMF would yield profits of about SDR 10 billion, which could be used directly to bolster the PRGT’s subsidy resources. And, thanks to high prices, this would still leave the value of the IMF’s gold close to record highs, helping to lessen any concern that sales could weaken an important buffer against other balance sheet risks. Longstanding concerns that sales should not disrupt the gold market could also be lessened by the small volume of sales and high levels of central bank buying, which would avoid the need for large sales on the open market.

But—and this is a big but—an 85 percent majority of the IMF’s executive board is needed to approve gold sales, so they cannot proceed unless backed by the US, which in turn requires congressional backing. Although IMF gold sales do not have any budgetary cost for the US, an assertive minority in Congress that is openly opposed to multilateralism could block approval. And even if sales were possible, it would take years—not months—to mobilize profits for the PRGT. Recently Under Secretary of the Treasury Jay Shambaugh indicated at a CGD event the United States would not push gold sales.

IMF reserves could, in time, meet some of the needs

Tapping reserves would be difficult to justify while they remain below the level only recently reaffirmed as necessary to mitigate risks. When this target is reached—probably in the next two years—there may be greater scope, but any use of reserves would likely be much smaller than the profits that could be attained from gold sales; SDR 3 billion is perhaps the upper limit. There is a further complication that reserves cannot be transferred directly to the PRGT. By a 70 percent majority vote, they can be distributed to IMF member countries. A decision to go ahead could be made conditional on commitments from countries to return their shares of a distribution to the PRGT. But this is likely to entail a significant additional delay. 

If possible, the IMF could sharply lower costs by ending reimbursement of the GRA

Annual payments to cover the administrative costs of running the PRGT were suspended for five years as part of the fundraising effort launched in July 2021. But the cost estimates above include the resumption of reimbursements.  If reimbursement could be eliminated—the IMF’s constitution may prevent this—it would reduce the total cost by about SDR 1.7 billion.

Adjusting the investment strategy of the PRGT’s endowment could lower costs

If the PRGT’s subsidy and reserve accounts could earn a higher premium over the SDR rate, this would lower the costs of replenishing the PRGT.  But unless there is an appetite to take on much greater risks, the potential savings from incremental changes to this strategy are likely to be relatively modest.

Charging borrowers a higher interest rate would lower costs… but also concessionality

In the extreme, subsidy costs could be eliminated by charging borrowing LICs more. But moving in this direction would undercut an integral feature of the PRGT’s support for LICs.

Higher rates would lower the concessionality of PRGT lending at a time when an increasing number of LICs are at risk of debt distress.

Paying all lenders a lower interest rate would lower costs if lenders agreed

Reducing the interest rate paid to lenders by 0.25 percent would, in the long run, reduce the cost by about SDR 1.2 billion. This would be about the same as the savings generated by charging lenders an additional 0.25 percent rate, but it would require the agreement of all lenders. Neither interest change would have an impact on reserve coverage.

A concerted effort is needed on multiple fronts, and perhaps a different model

The obstacles to some of these options, notably gold sales, may ultimately prove insurmountable. And even if no options are ruled out, they would yield uncertain results over different time horizons. The best approach is thus to push on all fronts, recognizing that some steps,  including donor support that is urgently needed, could serve as a bridge to a longer-term resolution.

In the best case, the financing gaps will be closed and the PRGT’s lending capacity will be augmented. But there is a very real risk that resources will fall short. The resulting scaled-back PRGT would be less attractive to LICs and less effective in supporting the macroeconomic stability that is essential for sustaining growth and reducing poverty.

An alternative could lower the immediate costs of raising lending capacity and make the PRGT’s financing model more resilient to future periods of stress.

• In normal or more benign periods, all or most of the subsidy costs would be met by the PRGT as in the current model. Borrowers would continue to pay zero or very low interest rates and lenders would receive the SDR interest rate or only slightly less with a smaller endowment meeting this difference.

• But when demand for lending surges, or interest rates reach higher levels, there could be a cap on the interest rate paid to lenders.

• The PRGT has relatively few lenders. In this alternative, a much larger number of lenders would be needed so that the costs of subsidizing loans would be born more equitably.

Moving to this alternative would not be easy. But the prize would be a sustainable PRGT delivered at a lower immediate cost.