What is standby credit? Definition and examples
Standby credit, also known as a loan commitment or standby loan, is a commitment by a lender such as the International Monetary Fund to make certain funds available for lower income countries for a specified period if they need it.
The International Monetary Funds (IMF’s) Standby Credit Facility was created under the Poverty Reduction and Growth Trust as part of a larger reform aimed at making the IMF’s financial support more flexible and better suited to the different needs of low income nations including in times of shocks and crises.
The Standby Credit Facility (SCF) carries a lower interest rate, provides high access, can be used on a precautionary basis, and focuses on the nation’s poverty reduction and growth plans.
The SCF supports low income countries (LICs) that meet its criteria regarding sustainable macroeconomic positions and their plans for durable growth and poverty reduction. It also provides policy support and can help catalyze foreign aid.
The standby credit is available for IMF member nations facing an immediate or looming balance of payments need, where its financing and adjustment requirements are forecast to be resolved within 24 months.
The IMF’s standby credit lasts up to 24 months. In some cases, the facility can be extended.
An SCF carries a 0.25% interest rate “but is subject to exceptional relief of all interest payments on outstanding concessional loans due to the IMF through the end of 2016.” It has a grace period of 4 years and a final maturity of eight years. Interest rates are reviewed every two years.
According to ft.com/lexicon, standby credit is:
“A commitment by a bank or other lender (such as the International Monetary Fund) to make available certain funds for a specified period if needed. Also called standby loan or standby loan commitment. In the case of an IMF loan, the borrowing country may have to make certain economic policy commitments.”
Example of a standby loan
In May 2015, the IMF extended a standby loan for Tunisia by seven months, giving it time to put banking and fiscal reforms in place, Reuters news agency reported.
The IMF said in a statement “The extension will provide time for the Tunisian authorities to implement the policy measures needed to deliver on forward-looking commitments – notably on the banking and fiscal reforms – which will help reduce vulnerabilities and spur higher and more inclusive growth.”
In June 2013, the IMF had approved a $1.75 billion standby arrangement, of which about $1.15 had been disbursed by May 2015. The 7-month extension would keep the loan in place until the end of 2015.
Under the arrangement, Tunisia agreed to follow specific economic policies, such as keeping its deficit under control.