Resilience and Sustainability Facility (RSF)

Why in News? India raised concerns at the International Monetary Fund (IMF) about the effectiveness of its funding to Pakistan and abstained from voting on a $1 billion disbursement under the Extended Fund Facility (EFF) and a $1.3 billion Resilience and Sustainability Facility (RSF), citing Pakistan’s poor track record and potential misuse of funds for state-sponsored cross-border terrorism.

Relevance : UPSC Pre &  Mains

Prelims : EFF/RSF

Mains :   GS Paper 2: IR/GS Paper 3: national Security and regional stability:

Key points:

• India’s concerns: Questioned the efficacy of IMF programmes due to Pakistan’s poor track record and raised fears of debt financing being misused for state-sponsored cross-border terrorism.
• Abstention: India abstained from the IMF Executive Board vote on $1 billion EFF and $1.3 billion RSF due to procedural constraints that allow only “yes” or abstention, not a “no” vote.
• Pakistan’s IMF history: A prolonged borrower, Pakistan has received IMF disbursements in 28 of 35 years since 1989, with four programmes since 2019 and 24 loan facilities since 1958, making the RSF the 25th.

Extended Fund Facility (EFF)

• The EFF is an International Monetary Fund (IMF) financial assistance program designed to help member countries facing serious medium- to long-term structural balance of payments problems.
• An International Monetary Fund (IMF) lending arrangement to assist countries with serious medium-term balance of payments problems due to structural weaknesses in their economies, requiring fundamental reforms.
• Duration: Typically longer than other IMF facilities, with programs lasting 3–4 years, extendable to 5 years in exceptional cases, to allow time for deep structural reforms.

Eligibility: Available to IMF member countries facing prolonged balance of payments deficits caused by structural issues like low productivity, weak institutions, or economic distortions.

Funding: Provides financial assistance in tranches, disbursed based on progress in implementing reform targets (e.g., fiscal consolidation, monetary policy adjustments, or governance improvements). Amounts depend on the country’s quota and needs.

Conditions: Requires strict adherence to IMF policy conditions, including macroeconomic stabilization and structural reforms, monitored through regular reviews.

Interest Rates: Relatively low, based on the IMF’s market-related interest rate (Special Drawing Rights rate), with surcharges for large or prolonged borrowing.

 Repayment: Loans repaid over 4.5–10 years, with a grace period, allowing countries time to stabilize economies.

About RSF:

The Resilience and Sustainability Facility (RSF) is a financing mechanism established by the International Monetary Fund (IMF) under the Resilience and Sustainability Trust (RST) to provide affordable, long-term loans to low-income and vulnerable middle-income countries. Launched in October 2022, it aims to help these nations address macro-critical, longer-term structural challenges that pose risks to prospective balance of payments (BoP) stability, particularly those related to climate change and pandemic preparedness. Below is a comprehensive overview of the RSF based on available information:

Key Objectives

The RSF complements the IMF’s existing lending toolkit by:

• Supporting Policy Reforms: It funds reforms to reduce macroeconomic risks from long-term challenges like climate change (e.g., adaptation, mitigation, and energy transition) and pandemic preparedness.
• Enhancing Financial Buffers: It increases policy space and financial resilience to mitigate prospective BoP risks.
• Promoting Sustainable Growth: It contributes to long-term economic resilience and stability, addressing global public goods like climate action and health security.

Eligibility and Access

• Eligible Countries: About 75% of the IMF’s 190 member countries qualify, including:

• • All low-income countries.
  • Vulnerable middle-income countries.
  • Small developing states.

• Requirements for Access:

Concurrent IMF Program: Countries must have an active IMF-supported program with upper credit tranche (UCT) quality conditionality (e.g., Stand-By Arrangement (SBA), Extended Fund Facility (EFF), Extended Credit Facility (ECF), etc.). Emergency financing facilities like the Rapid Financing Instrument (RFI) do not qualify.

High-Quality Reform Package: Reforms must address critical risks related to climate change or pandemic preparedness and demonstrate significant progress.

Sustainable Debt: Debt must be assessed as sustainable using the IMF’s Debt Sustainability Frameworks (for low-income or market-access countries).

Capacity to Repay: Countries must demonstrate adequate repayment capacity.

Other related terms :

Upper Credit Tranche (UCT):

• Upper Credit Tranche (UCT) quality conditionality refers to a set of rigorous economic policy reforms and performance criteria that countries must implement to access financing from the International Monetary Fund (IMF) above a certain threshold of their quota, known as the “upper credit tranche.”
• UCT conditionality applies to IMF lending when a country borrows beyond the “first credit tranche” (typically 25% of its IMF quota). It requires a country to adopt and implement a comprehensive program of economic reforms to correct structural or macroeconomic imbalances causing BoP difficulties.

Purpose: Ensures that IMF financing is accompanied by policies that restore external viability, fiscal sustainability, and economic stability, while safeguarding the IMF’s resources (i.e., ensuring repayment capacity).