COVID-19: IMF creates Short-Term Liquidity Line to enhance Financial Safety Net

In the context of intensified demand for liquidity and heightened global uncertainty, the International Monetary Fund (IMF) executive board has approved a Short-term Liquidity Line (SLL) to enhance adequacy of financial safety net of its members. Nigeria is a member country of the Fund.

The Covid-19 pandemic has created severe disruptions in the global financial system, with many emerging market and developing countries (EMDCs) facing liquidity shortages.

In a statement by the Washington-based Fund released on Wednesday night, it said the SLL approval was made by the board on April 15, 2020.

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The SLL is a special facility designed as a revolving and renewable backstop for members with very strong fundamentals and policy track records. It provides liquidity support for members facing potential short-term moderate balance of payments difficulties, reflected in pressures on the capital account and reserves, and resulting from volatility in international capital markets. The SLL aims to reduce the impact of liquidity events and minimize the risk of shocks evolving into deeper crises and generating spillovers to other countries.

Executive Directors considered and approved the establishment of the Short‑term Liquidity Line (SLL), as part of the Fund’s COVID‑19 response. They noted that the SLL would fill a gap in the Fund’s toolkit and complement other layers of the global financial safety net. Directors agreed that the SLL can provide important liquidity support to members with very strong policy frameworks and fundamentals facing potential short‑term moderate balance of payments (BOP) difficulties, as specified in the proposed decision. They noted that this could help prevent liquidity pressures developing into solvency crises and avoid spillovers to the broader membership. Despite some differences in views and preferences, Directors were willing to support the proposal in a spirit of compromise.

The directors supported the creation of the SLL for a period of 7 years, with an expectation that, by end‑2025, the Executive Board will decide whether to extend the facility beyond the 7‑year period. They agreed that this compromise approach would balance concerns about the innovative nature of the SLL and the potential impact on Fund resources. Directors looked forward to reviewing the initial experience with the SLL, as part of the next review of the Fund’s FCL and Precautionary and Liquidity Line in 2022.

Directors broadly supported the core design features of the SLL, built on the work done in 2017. They considered that the revolving access of up to 145 percent of quota should provide cover against most repeated moderate shocks that the SLL is designed to address, and that the availability of successor arrangements, subject to continued qualification and the presence of the special BOP need, would ensure that the SLL is a reliable backstop. Directors also noted that having the same high qualification bar as the Flexible Credit Line (FCL) would facilitate transition from the FCL to the relatively lower access of the SLL, allowing more efficient allocation of Fund resources. A few Directors would have preferred a lower qualification bar and/or higher access.