The International Monetary Fund approved on Thursday a number of policy reforms and a funding package that aim to support the recovery of low income countries (LICs) from the Covid-19 pandemic. The new measures boost access to concessional financing by 45 per cent and remove limitations on access for the poorest countries. This will allow them to receive full support from the IMF when their economic programmes “are assessed to warrant exceptional levels of assistance”. “These higher access limits will allow provision of more concessional support to countries with large balance of payments needs that are implementing strong economic programmes to restore inclusive growth, while maintaining sustainable debt positions,” the IMF said. The Washington lender’s board also approved a two-stage funding strategy to cover the cost of pandemic-related concessional lending and support the sustainability of the Poverty Reduction and Growth Trust. The IMF provided financial assistance to 53 of 69 eligible low-income countries in 2020 and in the first half of this year. About $14 billion has been provided as zero per cent interest rate loans from the PRGT. The fund provided debt service relief to 29 of its poorest and most vulnerable member states. Low-income countries, which include Somalia and Sudan, received $1.7bn in total debt relief from the IMF. Interest rates on PRGT loans will remain at zero through July 2023, allowing low-income countries to obtain financial assistance on more favourable terms than market rates or borrowing from the fund’s General Resources Account. Fund lending to LICs increased to more than six times the annual average of the past decade because of the pandemic, which disrupted global trade, led to lockdowns, job losses, a halt to air travel and an increase in poverty levels. Lending to LICs is expected to remain elevated for several years, the fund said, as countries seek additional funding to respond to and recover from the pandemic. The IMF’s newly approved two-stage funding strategy aims to secure about $4bn in subsidy resources that will finance zero-interest lending from the PRGT. About $0.7bn of this will be drawn from the fund’s internal resources. This will be combined with voluntary subsidy contributions of $3.3bn from the lender’s economically stronger members. The IMF will look to raise about $18bn in new PRGT loan resources from the trust lenders that will be made available as loans to LICs. The second stage (2024–25), would seek a lasting solution to the financing of the fund's concessional lending model, informed by an updated assessment of likely demand for fund financing from LICs, the IMF said. “Donors will have flexibility about how and when they deliver their subsidy contributions, which could be pledged upfront and disbursed over time,” the lender said. IMF directors were in broad agreement that the proposed reform package would better position the lender to respond to the needs of LICs, the fund said. “With many LICs facing substantial debt vulnerabilities, directors agreed that programme design needs to pay close attention to the expected evolution of debt burdens and the risk of countries falling into debt distress. Higher levels of lending would mean higher credit risk to the fund and a corresponding need for more in-depth analysis of capacity to repay the fund,” the lender said. On Thursday, Moody’s ratings agency said damage from the pandemic is raising financial risks of countries and social pressures. "For most sovereigns, pandemic-related output loss will not recover by 2023," said David Rogovic, a senior analyst at Moody's. "Economic scarring from the Covid-19 crisis will compound underlying challenges related to fiscal consolidation and the reversal of debt accumulation. It will lower income levels, exacerbate inequality and increase poverty." The ratings agency said the pace of the economic recovery and the resulting degree of scarring would be determined in part by the structure of each country’s economy and the adaptability of labour and goods markets, the response of politicians and the speed of vaccinations. “Only a few economies will have limited to no economic scarring, with real GDP slightly below or even above pre-pandemic forecasts by 2023,” Moody’s said. Advanced economies like the US and most of western Europe that have accelerated vaccination programmes will fare better with limited scarring along with China, which was swift in its response to the crisis, the ratings agency said. “Scarring will be the deepest for economies more narrowly focused on industries like tourism and those with weak institutional capacity,” Moody’s said. “The credit implications will be the most significant for sovereigns where deep scarring combines with already high government debt burdens and weak institutional capacity to support the recovery.”