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IDB approves up to $100 million contingent credit line for El Salvador

The Inter-American Development Bank (IDB) has approved a contingent line of credit up to $100 million to the Central Reserve Bank of El Salvador to cushion the country from potential external shocks through a Development Sustainability Contingent Credit Line (DSL).

Resources will mitigate the effects that external macroeconomic and financial shocks could have on vulnerable populations, which may suffer from temporary liquidity contractions in the financial system, dampening the supply of credit.

The DSL makes $6 billion available to the IDB’s 26 borrowing member countries over the 2012-2014 period, with a maximum of $2 billion per year, with unused resources from one year carrying over to the next. The credit line is designed to help countries protect its poorest citizens from sharp fluctuations in commodity prices, global liquidity crises and other external factors.

The effects of an external shock influence supply and demand for credit and a liquidity shortage can increase the cost of lending. The project is expected to moderate the average daily change on short term lending rates in about 100 basic points (bp), and reduce excess reserves so the freed-up funds can be used to extend credit.

The project includes trigger mechanisms for the DSL to be used such as the Emerging Market Bond Index (EMBI) spreads and deposit levels.

With the IDB’s financing, El Salvador’s Central Bank will have a new vehicle for collecting and accumulating reserves that could be used to distribute liquidity to illiquid but solvent financial institutions, supplementing the temporary liquidity supports.

The IDB loan which is executed by the Central Reserve Bank of El Salvador (BCR) is for a 6-year term, with a 3-year grace period and an interest rate based on LIBOR.

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