The International Monetary Fund (IMF) has launched their first-ever Trust Fund, the ‘Resilience & Sustainability Trust’ (RST) with an investment value of US$50 billion. The finance will be available from May 1.

UN Secretary-General Antonio Guterres said “The RST builds in a long-term perspective and will support developing countries and vulnerable middle-income countries in addressing issues such as climate change and the protracted COVID-19 pandemic, while also improving resilience to future shocks. A long-term perspective is needed if we are to address not only the current three-dimensional crises but retain hope of rescuing the Sustainable Development Goals.”

The RST mirrors much of China’s Belt and Road Initiative policy, and adds to the US ‘Build Back Better World’ and EU’s ‘Global Gateway’ funds – now of course limited in scope due to the huge amount of sanctions both have put into position on Russia and Belarus – sanctions that have a knock-on effect on emerging nations dependent on them.

Key design features of the IMF Trust are as follows:

About three quarters of the IMF’s membership could be eligible for RST financing. This would include all low-income countries, all developing and vulnerable small states, and all middle-income countries with per capita GNI below 10 times the 2020 IDA operational cutoff , or about US$12,000. This differs from the US and EU funds as democracy is not a qualification.

The RST support aims to address macro-critical longer-term structural challenges that entail significant macroeconomic risks to member countries’ resilience and sustainability, including climate change, pandemic preparedness, and digitalization. That said, not all long-term structural challenges lend themselves to IMF lending. The ability to support reforms in a particular area would depend on the availability of and access to strong diagnostics, the ability to identify policy priorities, and develop the appropriate reform targets. Country ownership and strong commitment of the authorities to do the necessary reforms will be critical to catalyze the much-needed finance from multilateral development banks and the private sector. It is also critical to work in close coordination with other relevant institutions in order to leverage expertise and knowledge. The IMF and World Bank staff have worked closely to develop a coordination framework on RST operations on climate risks, building on earlier experience in supporting countries with structural reforms. Similar frameworks with relevant institutions will be developed in the coming months in this and other reform areas.

To qualify for RST support, an eligible member would need: a package of high-quality policy measures consistent with the RST’s purpose; a concurrent financing or non-financing IMF-supported program with appropriate macroeconomic policies to mitigate risks for borrowers and creditors; and sustainable debt and adequate capacity to repay the Fund.

Like the IMF’s highly concessional and currently zero interest rate Trust for low-income countries (PRGT), the RST would be established under the IMF’s power to administer contributor resources, which allows for more flexible terms, notably on maturities, than the terms that apply to the IMF’s general resources. Consistent with the longer-term nature of balance of payments risks the RST seeks to address, its loans would have much longer maturities than traditional IMF financing. Specifically, staff has proposed a 20-year maturity and a 10-year grace period. A tiered interest structure would differentiate financing terms across country groups, with a high degree of concessionality for lower-income members.

Access to RST financing would be determined case by case, based on the strength of reforms and debt sustainability considerations, and is expected to be capped at 150% of the IMF quota or SDR 1 billion, whichever is smaller. RST lending would be part of a broader financing strategy members would pursue to address longer-term balance of payments risks, involving a mix of multilateral, bilateral official, and private financing.

Like the PRGT, the RST’s resources would be mobilized on a voluntary basis from members who wish to channel their SDRs or currencies for the benefit of poorer or vulnerable countries . The financial architecture of the RST is designed to ensure that substantial resources for low-cost long-maturity loans can be mobilized while ensuring the safety and liquidity of contributors’ claims on the Trust based on a multilayered risk management framework that maintains the reserve asset nature of channeled SDRs. To meet the projected demand, the RST would need to mobilize initially around US$50 billion in total resources. A smooth functioning SDR trading market would underpin successful RST operations.

The IMF then go on to say “Mitigating economic risks from long-term structural challenges requires a consistent and deliberate approach, with strong commitment from policymakers to undertake sometimes difficult reforms. And where such commitment is evident, the international community can help with affordable financing, capacity building, and policy advice. The RST will support such a collaborative effort. We will build on our experience of working with the World Bank and other international institutions and regional development banks, complementing their lending to provide the best support to member countries.

The success of the new Trust will depend equally on economically stronger IMF members providing meaningful resources to help countries improve long-term resilience and sustainability; borrowers willing to go the extra mile to achieve the macroeconomic environment and reform framework conducive to improving balance of payments stability; other international financial institutions supporting with their expertise, knowledge, and financing where feasible. These actions would also help mobilize private sector investment.

Faced with a range of long-term structural challenges that require global action, it has never been more important to support all countries tackle these challenges at an early stage and achieve sustainable growth. The RST could help achieve this goal.”

The launch of the RST is a welcome addition to the increasing numbers of globally available funds that are now geared at emerging and low income economies. From the basic premise of the RST, it seems apparent that certain African nations are likely to take up a large proportion of the available funds. With the IMF part of the World Bank, there is inevitably a political element that could creep into well-meaning causes; purely because the United States is the largest shareholder, and every single World Bank President has been a US national since 1944, effectively giving Washington veto powers. It remains to be seen how much of the RST funding will have to comply with US foreign policy – which may be tough to swallow given that 82.75% of the World Bank shareholding is owned by other nations.

Chris Devonshire-Ellis is the Chairman of Dezan Shira & Associates. The firm assists British and Foreign Investment into Asia and has 28 offices throughout China, India, the ASEAN nations and Russia. For strategic and business intelligence concerning China’s Belt & Road Initiative please email silkroad@dezshira.com or visit us at www.dezshira.com

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