EMERGING market economies (EMEs) such as India are expected to get loan from International Monetary Fund (IMF's) new facility named Short-term Liquidity Line (SLL).

On 22nd April, IMF Executive Board approved creation of SLL to assistance countries with strong fundamentals and policy track records. The SLL is a special facility designed as a revolving and renewable backstop for members created for them to tackle Covid-triggered economic crisis. SLL would exist for seven years. Executive Board is expected to decide by end-2025 whether to extend the facility beyond this period.

Indian Finance Minister Nirmala Sitharaman had demanded creation of SLL at 41st meeting of International Monetary and Financial Committee (IMFC) held on 16th April.

In her IMFC statement, she suggested: "In the context of large portfolio outflows from EMEs post Covid, a non-stigmatized short-term liquidity line would be a valuable instrument to inject liquidity into member countries that are otherwise strong on economic fundamentals and policies".

She added: "On the general allocation of SDR being envisaged, there are concerns. In the current context of illiquidity and flights to cash, the efficacy of an SDR allocation is not certain, and that in the absence of a global safety net, countries rely on national reserves as the first line of defence against market turmoil and confidence crises. Consequently, extraneous demands for these reserves, not related to domestic monetary and financial stability, would be costly, and hence cannot be supported".

SLL would provide liquidity support to EMEs facing potential short-term moderate balance of payments difficulties, reflected in pressures on the capital account and reserves, and resulting from volatility in international capital markets. SLL would reduce the impact of liquidity events and minimize the risk of shocks evolving into deeper crises and generating spillovers to other countries.

In a policy paper (PP), IMF has explained procedure for operation of SLL right from informal consultations with prospective applicant to making public staff report on country a few days after signing of loan agreement.

According to IMF release, "Directors generally supported the innovative features of the SLL designed to minimize perceived stigma associated with Fund financing, including the Board's approval of an arrangement, conditional on the member availing itself of the arrangement".

The release adds: "They recognized the possibility of a Central Bank sole signatory, provided that certain requirements are met, consistent with the Fund's standards for the signatory of letters of intent or written communications. A few Directors noted that signatures from both the Ministry of Finance and the Central Bank would increase the credibility of the policy commitment".