What you need to know:
Motivation. World body wants to support economic development in the nations
The International Monetary Fund (IMF) executive board has again extended the duration of zero interest on its loans to low income countries by another two years up to the end of 2016 in order to support economic development in these economies.
This is the third time the IMF has extended the duration for zero interest rates on its loans as global, regional and national economies continue to face fiscal policy hurdles.
The loans are lent out on concessional basis; soft loans that normally attract very low interest rate with repayment period of 10 years.
However, due to the high financial needs required to meet their development expenditures, the poor countries in Africa and other parts of the world are always faced with the debt burden.
The interest waiver on IMF concessional loans relieves the countries the burden of serving the debt that they would be borrowing within this period.
The executive board initially endorsed temporary relief of interest payments on all outstanding concessional loans for Poverty Reduction and Growth Trust-eligible members in 2009, waiving all interest payments on loans through December 2011.
Two subsequent extensions of the exceptional interest rate waiver were approved by the board, first to end of December 2012 and then ending in 2014.
The latest approval on December 11, 2014 is therefore the third extension of zero interest applied to IMF financing to the world’s poorest countries.
“The executive board decision to keep interest rates at zero for all concessional loans for a further two years is testament to the Fund’s continued support for Low-Income Countries (LICs) since the global economic crisis of 2009.” said IMF managing director Christine Lagarde.
In February 2012, the board approved the distribution Special Drawing Right (SDR) 700 million (about $1.1 billion) in reserves attributed to windfall gold sales profits to its members in order to boost the IMF’s concessional lending capacity for low-income countries.
The SDR is an international reserve asset, created by the IMF in 1969 to supplement its member countries’ official reserves. Its value is based on a basket of four key international currencies, and SDRs can be exchanged for freely usable currencies.
It is always allocated to IMF member states depending on the size of their economy. Uganda normally gets allocation of SDR from IMF in millions of US dollars for Poverty Reduction and Growth Trust.
Need for support
Low-income countries face the effects of slow global recovery and increased volatility in food and fuel prices. A recent review of low-income countries facilities noted a strong and continuous demand for fund support.