2020-10-29
Bank of Lithuania stands ready to lend to the IMF to mitigate COVID-19 consequences
The Bank of Lithuania concluded the Bilateral Borrowing Agreement with the International Monetary Fund (IMF), whereby the central bank could provide it with loans of up to €297 million. Such bilateral agreements with financially sound countries are the IMF’s reserve financial arrangement to be used if it runs short of available funds to mitigate the global economic consequences of the pandemic.
“Lithuania’s open economy is particularly dependent on the international environment, thus a gradual and sustainable economic recovery is definitely in our interest. Therefore, by signing the Bilateral Borrowing Agreement, we confirm our readiness to contribute to the IMF’s financial pillow that may be necessary in providing support to the most affected countries”, said Vitas Vasiliauskas, Chairman of the Board of the Bank of Lithuania.
He also noted that this Agreement should be considered as recognition of Lithuania’s progress, since such arrangements are made only with financially sound countries. The Bank of Lithuania is gradually increasing its involvement in the IMF’s activities. The new commitment will strengthen the country’s voice both at the Fund and the Nordic-Baltic Constituency, which is jointly represented at the IMF Executive Board by a single executive director.
The Agreement signed between the Bank of Lithuania and the IMF will become effective from 1 January 2021 and will run through 31 December 2023, with the possibility of extension for one further year. It provides for two scenarios of the Bank of Lithuania’s lending to the IMF in terms of loan size, which will depend on the current reform of the Fund’s resources.
The main and constant source of the IMF’s financing is member country quotas, which currently amount to SDR 477 billion (around €575 billion) and comprise almost half of its total funds. When needed, additional IMF resources are provided by member countries through multilateral borrowing agreements (Lithuania does not contribute to this particular source) and bilateral borrowing agreements. As of 2021, the IMF intends to double multilateral borrowing resources under the so-called New Arrangements to Borrow, which constitute a second line of defence after the IMF quotas, to SDR 286 billion (approximately €345 billion). By signing the Bilateral Borrowing Agreement, the Bank of Lithuania has committed to lend up to €297 million to the IMF, if needed, after the implementation of the said reform.
In case the IMF fails to implement changes to its resources, the Bank of Lithuania’s commitment under the Bilateral Borrowing Agreement could rise to €690 million. However, this scenario is not currently considered as likely.
The bilateral borrowing arrangement is one of the IMF’s reserve financing sources based on agreements signed between the IMF and its member countries, whereby they undertake to provide lending to the Fund for the interest set at the time of lending, if such a need arises. The countries lend to the Fund under this arrangement only where available resources – first of all, country quotas and multilateral borrowing arrangements – are insufficient to ensure the necessary lending capacity. Up until now, the IMF borrowed from its members under bilateral agreements only once (during the global financial crisis in 2009).
Following the Bank of Lithuania’s agreement with the IMF, the funds would be allocated from financial assets of the central bank, which means that it would have no effect on the state budget, liabilities or debt.
The IMF is an organisation of 190 countries that promotes international trade, high employment and sustainable economic growth as well as contributes to the strengthening of financial stability and the reduction of poverty around the world. Lithuania has been a member of the IMF since 1992. Total member country quotas amount to SDR 477 billion (approximately €575 billion). Of these, the assets of Lithuania comprise SDR 441.6 million (approximately €532 million).