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Definition: Credit Tranche
Putting it simply, credit tranches are instalments or sums or payments of money in which International Monetary Fund (IMF) executes its credit disbursement facility to its member nations who want to avail these facilities and take loan from IMF for various purposes which can be to fund economic growth, to pay its creditors or to come out of an economic hardship.
Credit Tranche may be called a system which is put into use by the International Monetary Fund (IMF) to look over its crediting activities to member nations. If there is a BOP-Balance of Payment crisis in a member country and it applies for a loan facility for help, the IMF would give out the loan in a series of credit tranches. These tranches are a small pie of the complete credit that would be provided to the member country, only if it fulfils the terms and conditions or requirements put forth by the IMF.
Normally, 18 months to 3 years is what an International Monetary Fund credit usually lasts between. In the beginning of providing the loan, the debtor country must be able to prove and showcase that reasonable amount of efforts have been put into overcoming its financial hardships. Once IMF is sure that this requirement is being met, the nation shall receive the first of its various credit tranches of the loan which 25% of its total credit value in most of the cases. The subsequent series of credit tranches will again have various terms and conditions, each of which the member nation must satisfy before becoming eligible to receive the next tranche of loan. IMF credit may be subject to various different conditionality and phasing, which depends upon the chunk or size of the tranche, that is whether it is made available in the first credit ‘tranche’ (or segment) of 25 percent of a member country’s quota or in the upper part of the credit tranches (any chunk above 25 percent of quota). To receive the drawings in the first credit tranche, member nations have to showcase reasonable efforts being put in, to overcome their balance of payments difficulties.
If and when the performance targets are met, upper credit tranche drawings would be made in instalments, or in a phased manner. These instalments are normally associated with Stand-By or Extended Arrangements. These arrangements in general, seek to resolve the balance of payments difficulties faced by the member nations and to enable reforms in structural policy wherever it may be appropriate. Policy implementation is assessed by measuring performance criteria and looking into periodic reviews. For example one of the newspaper reports on the Greece economic crisis on December 8, 2014 stated that, ‘Greece may need some more time before the last bailout credit tranche can be disbursed by international lenders, German Finance Minister Wolfgang Schaeuble said on Monday in Brussels’. This shows the importance and applicability of credit tranches in today’s economic scenario.