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Nigeria, others can borrow at zero interest –IMF

From Amechi Ogbonna, Washington DC, USA

The Executive Board of the International Monetary Fund (IMF), has approved a modification in the mechanism governing interest rate, setting of Poverty Reduction and Growth Trust (PRGT) facilities and set the interest rates to zero on all its concessional loans under the PRGT for Nigeria and other Low Income Countries (LICs) over the next two years ending December 2018.
This means that Nigeria can now borrow at zero interest rate to support its social safety net and poverty alleviation programmes across various groups in the country.
Under the modified mechanism, rates will continue to be set at zero for as long as, and whenever global interest rates are low.
At a briefing by the Managing Director, Christine Lagarde in Washington DC, Thursday, the Fund said the zero interest will provide continued support to LICs amidst their current challenging global environment.
“The modification introduces an additional threshold for the Special Drawing Right (SDR) reference rate and sets the interest rates on the Standby Credit Facility (SCF) and the Extended Credit Facility (ECF) to zero if the SDR reference rate is lower than or equal to 0.75 percent.” The Executive Board also decided to waive interest rate charges on outstanding balances under the Exogenous Shocks Facility until the next review of the interest rate mechanism in 2018.
“The Board had previously endorsed temporary relief of interest payments on all outstanding concessional loans for PRGT-eligible members in 2009, waiving all interest payments on PRGT loans through December 2011. It had also agreed thrice to extend the exceptional interest rate waiver, first to end December 2012, 2014, and then again to end-2016, providing interest rate relief to many LICs at a time when they face considerable headwinds from the global economic environment. Continual waivers would no longer be needed as the modification makes zero rates an integral part of the interest rate mechanism in periods of very low global interest rates, as at present, thereby preserving the concessional nature of PRGT financing.
It also welcomed the opportunity to review the interest rate structure for loans under the Poverty Reduction and Growth Trust (PRGT) and the mechanism established in 2009, which differentiates interest rates among PRGT facilities and links them to developments in world interest rates.
Directors noted that since the PRGT mechanism was adopted, the SDR interest rate has remained well below the 2 percent threshold. The application of the 2009 interest rate mechanism would imply that the interest rate on the Extended Credit Facility (ECF) be set at zero percent for 2017–18, and the rate on the Standby Credit Facility (SCF) at 0.25 percent.
Remaining credit under the Exogenous Shocks Facility (ESF), which is not part of the interest rate mechanism, would be charged 0.25 percent upon expiration of the interest rate waiver at end December 2016.
They also noted that the successive waivers on PRGT interest have benefited many low income member countries as they faced a challenging global environment. During the previous review, many Directors had also noted that the possibility of a prolonged period of very low interest rates called for an early re-examination of the interest rate mechanism, including an exit strategy from repeated application of the waiver, to safeguard the self-sustaining capacity of the PRGT.
Directors agreed that a strong case remains for maintaining zero rates on the Fund’s concessional credit, given the lack of improvement in the global economic outlook for low income countries and significant downside risks from lower commodity prices, weak external demand, and tighter financial conditions. They noted that market expectations of the timing and pace of interest rate normalization have been substantially revised down, possibly prolonging the period of very low interest rates. Directors observed that, under a very low interest rate environment, the application of the interest mechanism would result in some PRGT borrowers paying a rate on their outstanding concessional credit exceeding the PRGT’s cost of funding such credits, contrary to the concessional nature of  The directors supported preserving the concessional nature of PRGT financing in periods of very low global interest rates. To this end, the staff proposed a modification of the 2009 interest rate mechanism, introducing an additional threshold of 0.75 percent, below which the SCF interest rate would be set to zero, along with the ECF rate which would remain at zero until the SDR interest rate reaches 2.0 percent. As a result, both the SCF and ECF interest rates will be locked in at zero for 2017–18, and will stay at zero as long as and whenever global interest rates are very low, without requiring continual interest rate waivers.
A few Directors stated that there should be an explicit agreement now on a zero interest rate for the ECF and SCF through 2020. Directors shared the view that, given current market expectations, the modified interest rate mechanism will likely keep all PRGT interest rates at zero through at least 2020, and agreed that, if the mechanism were to generate a different outcome, it would be reassessed in 2018.
In addition, Directors also supported staff’s proposal to extend the zero interest rates charged on outstanding balances under the ESF for the period 2017–18.
The next review of the PRGT interest rate mechanism is scheduled to take place by December 31, 2018, providing Directors an opportunity to assess the implications of the mechanism in light of actual interest rate developments and economic challenges facing LICs at that time, and the findings of the facilities review.


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Posted by on Oct 8 2016. Filed under Economy, Headlines. You can follow any responses to this entry through the RSS 2.0. You can leave a response or trackback to this entry

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