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Macedonia: The Case of the Abused PCL

Sam Vaknin, Ph.D. - 6/5/2011

In January 2011, the Republic of Macedonia became the first country to benefit from the IMF’s PCL (Precautionary Credit Line): a contingent “insurance policy” of c. $650 million USD. At the time, the Executive Board of the IMF and the Fund’s Deputy Managing Director Naoyuki Shinohara made very clear that they expect Macedonia to not withdraw money from the facility. So did Wes McGrew, the IMF Mission Director to Macedonia and Petar Gosev, then Governor of the country’s Central Bank.

The PCL – formed in August 2010 – came with few strings attached. Its main aim was to signal to the markets that the recipient economy is soundly managed and that the Fund’s resources are fully behind it. This type of commitment, so went the received wisdom, would prevent contagion.

Not 70 days passed and on March 29, 2011, Macedonia withdrew almost half the credit line, c. 220 million euros. While clearly not in violation of the letter of the PCL, Macedonia’s conduct constitutes a gross violation of its spirit.

First, it is clearly stated that countries with PCL arrangements would be expected not to draw upon the available funds unless there is a “deterioration in external conditions.” This is not the case with Macedonia whose external conditions have actually gotten better this year. In October 2010, Fitch upgraded the outlook for Macedonia to “stable”, citing a “reduced reliance on financing from abroad”. In truth, Macedonia intends to use the PCL dough to plug gaping budget holes, the outcomes of its populist spending spree on the eve of early parliamentary elections.

The IMF also stipulates that '(c)ountries suffering any of the following problems (on approval) cannot access the PCL: (i) sustained inability to access international capital markets.' Yet, the country’s Minister of Finance, Zoran Stavreski, announced that Macedonia is tapping the PCL precisely because it cannot access international capital markets. Nor is it likely to be able to access them for a long time to come, what with the country’s largest investor, Greece (and the euro) falling to pieces On Macedonia’s doorstep.

According to our sources, these infarctions of the tacit understandings with the IMF and the haphazard manner in which the funds were withdrawn have angered the IMF and will be an important topic in the discussions during the forthcoming visit of the IMF delegation, immediately after the elections, in the second and third weeks of June. The IMF, we are told, would appreciate a repayment of the PCL credit as soon as practically possible. Macedonia may be taking advantage of the chaos in the Fund following Strauss-Kahn’s scandal-prompted premature departure to fend off the Fund’s insistent prompting.

Finally the PCL financing is not as cheap as the government had presented it. The IMF says: 'The cost of drawing under the PCL varies with the scale and duration of financing. Currently, the effective interest under the PCL (or an FCL or SBA) for access between 500 and 1000 percent of quota-ranges between 2.2-2.8 percent, and about 2.6-3.5 percent after 3 years. These interest rates exclude a flat 50 bps service charge, which is applied to all Fund disbursements.'

In other words, the very fact that Macedonia had withdrawn half of the PCL in one go (the equivalent of almost 300 percent of its quota) is going to hike the effective interest rate on future credits from the Fund, though not up to commercial borrowing levels (Macedonia paid 4.2% on its last tranche of short-term Eurobonds and 9.8% on its 3-years Eurobond, issued in 2009). The IMF is also likely to tighten the conditions attached to the PCL for future applicants, such as Serbia.

The IMF’s Resident in Macedonia, Alexander Tieman, naturally, won’t confirm any of this directly. In a prompt and courteous response to our queries, he noted:

“First, the IMF has not asked the authorities to return the money they drew under the PCL arrangement (some 220 million euros) after the elections. Rather, when drawing, the authorities themselves committed to “… make their best efforts to repay the PCL drawing ahead of schedule, provided that financing conditions are favorable.” (see IMF Press release of March 23, 2011 at http://www.imf.org/external/np/sec/pr/2011/pr1198.htm)

Second, let me assure you that all rules and procedures were followed in the drawing. Under a PCL arrangement, in the baseline case there is no expectation of drawing – there should not be a balance of payment need. The PCL is an insurance mechanism, and with insurance one does not expect the insured event to occur in the baseline case. However, changes in circumstances can justify a drawing. If a large balance of payments need arises unexpectedly, a country that has a PCL arrangement in place can draw on it. In the case of Macedonia, the authorities informed the IMF that their decision to draw upon the PCL reflected the changed circumstances brought about by the early elections, including a delay in the planned Eurobond issuance. Under the structure of the PCL, the authorities may draw on the credit line without seeking agreement from the IMF. This right to draw without needing to go back and seek IMF approval is one of the key features of the PCL.

You also refer to the qualification criteria for the PCL (http://www.imf.org/external/np/exr/facts/pcl.htm), where it says that countries with sustained inability to access international capital markets do not qualify for a PCL. The government informed us that, given the changed circumstances brought about by the early elections, a new Eurobond issuance had to be delayed, which in turn led to a request to draw on the PCL. However, in our judgment, Macedonia does not exhibit a sustained inability to access capital market, as evidenced by the 2005 and 2009 Eurobond issuances.

As to the cost of funds under the PCL arrangement, these are the standard IMF terms which also apply to our other main lending instruments. The lending rate is tied to the IMF’s market-related interest rate, known as the basic rate of charge, which is itself linked to the Special Drawing Rights (SDR) interest rate. The rate of charge is variable and stands at 1.52% as of May 30, 2011. This is the interest rate Macedonia currently pays on its PCL drawing. This interest rate excludes a flat one-off 50 bps service charge, which is applied to all Fund disbursements.

You are correct in stating that the cost of drawing under the PCL varies with the scale and duration of financing. Large loans, with credit outstanding above 300 percent of quota, carry a surcharge, which depends on the duration the loan remains outstanding. This, however, does not apply to the PCL drawing of Macedonia, which was in the amount of SDR 197 million, or 286 percent of quota (i.e., below the 300 percent of quota threshold).”