Some aspects of international credit lines in the context of volatile capital flows
Student name: Mr Karan Khosla
Guide: Mr Soumendu Sarkar
Year of completion: 2012
Host Organisation: Indian Statistical Institute (ISI), Delhi Centre
Supervisor (Host Organisation): Dr Gurbachan Singh
Abstract: In addition to various IMF-supported programmes, IMF offers an additional instrument –
‘International Credit Line’ to check sudden capital volatility. By far, four countries – Mexico,
Poland, Columbia and Former Yugoslav Republic of Macedonia have bought an International
credit line facility from IMF. The scope of this research is to check whether or not the feasibility
of funding by IMF involved in International Credit Line facility is questionable when a
substantial number of emerging and developing economies opt to use the option to borrow from
IMF under an International Credit Line contract. For this purpose, the maximum amount that
emerging and eligible economies can borrow from IMF under their Credit Line respective
contracts, in the event of sudden outflow of capital, is calculated. The IMF’s availability of Funds
for new financial commitments under International Credit Line is also found. The findings show
that in a worst case scenario when all the emerging and eligible economies need to draw on
resources of IMF simultaneously because of the liquidity crunch situation arisen due to sudden
stop in capital flows, IMF’s Forward Commitment Capacity (FCC) is less than the possible
financial requirement of emerging. However in a more likely scenario, IMF can sustain to offer a
Credit Line to at least few emerging and eligible economies. Few policy suggestions are been
made in this context. First, apart from its Bilateral and Multilateral borrowing arrangements, to
meet its FCC involved under the Credit Line contracts with eligible and developing economies,
IMF should be mandated to borrow from commercial bank or a Central Bank of a nation that is
not facing a liquidity crunch at the time when some other emerging economies are facing sudden
outflow of capital. Second, IMF should be mandated to act as an intermediate between buyers
and sellers of Credit Line. In both these cases, the problem of funding involved in a Credit Line is
solved even in a worst case scenario. Third, it is suggested that IMF may relax the restriction on
usage of its gold holding. This can increase IMF’s available resources for new financial
commitments.
