Emergency never comes with a prior invitation and doesn’t even let many nations prepare for it. Any nation can suffer substantial economic losses for many reasons like internal conflicts, natural disasters, sudden downfall in the economy, etc. In such cases, a nation needs quick financial help to revive itself, and the International Monetary Fund mainly offers that quick help. The IMF has adopted many policies to assist its member nations, in case of financial emergency. The Rapid Financing Instrument (RFI) and Rapid Credit Facility (RCF) are some emergency credit facilities offered by the IMF.
What is Rapid Financing Instrument?
The Rapid Financing Instrument (RFI) is a system designed by the IMF to provide quick financial assistance to its member countries with urgent BoP (Balance of Payment) needs. The RFI supports its member countries by providing quick financial help in urgent situations like natural disasters, internal conflicts, and during commodity price shocks. Before the launch of the RFI, the IMF use to support its member countries via two different policies Emergency Natural Disaster Assistance (ENDA) and Emergency Post-Conflict Assistance (EPCA). But the Rapid Financing Instrument (RFI) replaced these policies, as its more flexible with broader coverage. The RFI is specially designed to support the nations, in situations like severe economic disruption, and when not in the condition to meet its BoP need.
There are 2 windows for the nations to seek financial help under RFI from the International Monetary Fund (IMF).
- Regular Window: A regular window is available for the nations under the above circumstances. Also, it can claim an excess of 50% from the 12 months or 100% on a cumulative basis.
- Large Natural Disaster (LND) window: A LND window is open for a nation that goes through a large natural disaster and suffers a loss of more than 20% of its GDP. In such cases, a nation can claim an excess of 80% from the 12 months or 133.33% on a cumulative basis.
During the pandemic of COVID-19, the IMF increased the claim percentages of both the windows with an excess of 150% and 183.3% respectively. The RFI is accessible to all the member nations, even though member nations qualified for the Poverty Reduction and Growth Trust are bound to utilize the comparable concessional Rapid Credit Facility (RCF).
India doesn’t falls under Low Income Countries or Poverty Reduction and Growth Trust (PRGT) and is a member of RFI.
What is Rapid Credit Facility?
The Rapid Credit Facility or the RCF is pretty similar to the RFI but a concessional policy under which the IMF helps and supports Low-Income countries (LIC) with financial funds in case of an urgent need for BoP. The RCF was introduced under the Poverty Reduction and Growth Trust (PRGT), making this facility more refined with broader coverage. The RCF provides financial help to its member LIC countries regarding commodity price shocks, economic disruptions, or in case of a large natural disaster. This policy is only available for the nations that come under the Poverty Reduction and Growth Trust (PRGT). The Access to RCF of any nation is decided on the basis of its economic strength, capacity to repay funds and macroeconomic policies. Also, underlying pending payments of nations, their present economic condition, and poverty are also accessed before providing financial help under RCF.
Unlike RFI there are 3 windows, for the nations to seek financial help under RCF from the International Monetary Fund (IMF).
- Regular Window: A regular window is available to seek financial help from IMF under RCF, in case of urgent BoP needs that may arise due to economic fragility, or domestic instability.
- Exogenous Shock Window: An exogenous shock window is available for the nation that undergoes economic shock, and is in urgent need of BoP.
- Large Natural Disaster (LND) Window: A LND window is open for a nation that goes through a large natural disaster and suffers a loss of more than 20% of its GDP. The access and cumulative limits under the RCF depend upon the impact and suffered the loss of the nation.
The financing under RCF doesn’t attract a zero interest rate with a final maturity of 10 years and 5.4 years grace period.