In this working paper, John Williamson, senior fellow at the Institute for International Economics, evaluates proposals to create a short-term financing facility within the International Monetary Fund (IMF). The emphasis of this facility would be on the time period within which the IMF would respond to a request for assistance, rather than on the duration of the loan. According to Williamson, there are two situations in which existing arrangements within the IMF do not allow for a response quick enough to be effective: when a country is attempting to defend a pegged exchange rate and when default is imminent. Some have suggested that any new facility be able to lend to alleviate these circumstances. Those who support freely floating exchange rates, however, are opposed to supporting a pegged rate regime and favor restricting such activity by any new facility. Others would support the activities of a new facility only in cases that pose a systemic threat. Williamson focuses on the broadest of the purpose that could be fulfilled by a new facility: assisting countries to finance capital flows "judged to be unjustified by the fundamentals and therefore destabilizing." Proposals fitting this purpose (which date back some years and have been enjoying a recent resurgence) stipulate the countries that should have access to such a facility, the terms and level of access, maturity, and the source of the facility's financing. The author concentrates on a proposal laid out in a paper presented to the IMF executive board entitled "Short-Term Financing Facility" (September 1994). The IMF paper suggests that access be allowed to a broad range of member countries (the list consists of 22 industrialized countries, 12 Latin American countries, Korea and the 5 large Association of Southeast Asian Nations countries, Egypt, Israel, Jordan, Morocco, Tunisia, Turkey, Hungary, Poland, and South Africa). Terms of access would require that the right to borrow be approved at the time of an Article IV consultation and only after a comprehensive review revealed that the country had a strong record of appropriate economic policies and performance that were expected to continue and that there was no fundamental imbalance in its balance of payments. Once approved, the country might be expected to provide a "handful" of key financial statistics as long as the line of credit was available. The level of access would be commensurate with the size of reserve losses that a country could sustain over a short period, although shocks would not be fully financed and the facility would not be used to finance large or sustained capital outflows. The maturity of any facility loans would be short, with a suggested basic maturity of three months with the possibility of a three-month rollover. Financing would be provided from normal IMF sources, including the possibility of activating the General Arrangements to Borrow (GAB). Williamson evaluates the interests of countries expected to be eligible to draw from a new facility and countries that would not be eligible to participate. The dominant consideration for potential participants would be whether the facility would actually work. A facility loan might be enormously valuable in providing the time necessary for adjustment measures to take effect, but it might also delay necessary adjustments if it were granted before adequate measures were adopted. The IMF would therefore be required to make a judgment on whether such measures had, in fact, been adopted. Unfortunately, some critics contend that the IMF's record on such analysis has been lacking of late. Another important consideration is the speed with which loans would be disbursed. A preapproved line of credit would allow any loan to be dispatched with necessary speed, but, some argue, preapproval would impose demands on the analytical capacity of the IMF. Another potential problem is whether the IMF is capable of making loans large enough to alleviate the types of problems such a facility is proposed to address. Williamson suggests that if additional resources are necessary, they might come from an increase in the size of the IMF's regular resources, in the size of commitments to the GAB or an increase in the number of countries contributing to the GAB, from an alternative GAB-like facility created for such a purpose, or from borrowing in the financial markets. Non-participants would, of course, be interested in different issues. There could be some positive spillover effects from participating countries in that participating countries would be able to avoid unnecessary deflationary adjustments, thereby maintaining import demand. Another consideration is whether loans by the new facility would crowd out existing IMF activities. Non-participants might also be concerned if the creation of a new facility reinvigorated the IMF, which, according to the author, has provided few services of direct value to participants since the mid-1970s. The creation of the new facility could extend the scope of effective surveillance beyond the countries that borrow from the IMF
