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Bank activity: Graduation policy reaffirmed

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
June 1982
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World Bank’s graduation policy reaffirmed

Graduation of borrowers from the World Bank is a firmly established principle and has been a long-standing practice. The graduation policy was reaffirmed at a meeting of the Bank’s Board of Executive Directors recently.

Graduation is a process of slowly phasing out World Bank lending as the borrowing country reaches a level of development, management capacity, and access to capital markets that permits it to carry on without World Bank financing. The major features of this policy are the following:

1. Graduation is a logical step in the development process, and a clear set of guidelines for graduation from Bank lending is required.

2. Graduation should be a flexible and fair process, sensitive to each country’s individual circumstances; special features, such as the problems of small countries with narrowly based economies, will be recognized in the phase-out program.

3. Graduation will normally occur within five years after a country reaches a per capita gross national product (GNP) benchmark, but this period might be longer if the situation deteriorates during the phase-out period.

4. Graduation should be seen as a stage in the evolving relationship between the borrowing country and the Bank; the Bank will continue to provide support to those countries that wish it after lending has ceased, including such services as technical assistance (assistance in project work and institution building, review of economic policies, and arrangements for private financing), continued access to the courses of the Bank’s Economic Development Institute (which offers training to senior officials from developing countries), and continued eligibility for operations of the International Finance Corporation (IFC).

5. Once a program of graduation is agreed upon with the borrower, management will make a full report to Executive Directors.

6. The graduation issue, including any problem that may arise in the application of the per capita GNP level that triggers graduation, will be reviewed annually.

In 1973 the per capita GNP level that would trigger graduation was set at US$1,000 in 1970 prices. The 1980 equivalent is estimated at $2,650, after updating for inflation and exchange rate changes.

In its early years the Bank had made substantial loans to a number of industrial countries. By 1967, most of these borrowers had graduated. During the 1970s another group of higher income countries was graduated, including Finland, Greece, Iceland, Ireland, Israel, New Zealand, Singapore, Spain, and Venezuela.

Table 1IBRD borrowers with per capita GNP over $1,5001
Country1980 per capita GNP

(In U.S. dollars)
Oman4,380
Trinidad and Tobago4,370
Cyprus3,560
Bahamas3,300
Barbados3,040
Uruguay2,820
Yugoslavia2,620
Argentina2,390
Portugal2,350
Romania2,340
Chile2,160
Mexico2,160
Brazil2,050
Algeria1,920
Fiji1,850
Costa Rica1,730
Panama1,730
Malaysia1,670
Korea1,520
Source: 1981 World Bank Atlas.

Countries to which IBRD loans have been made in fiscal years 1979–82.

Source: 1981 World Bank Atlas.

Countries to which IBRD loans have been made in fiscal years 1979–82.

The principle of graduation derives mainly from the Bank’s Articles of Agreement; these require that the Bank must, before making a loan, satisfy itself that the country cannot obtain the loan on reasonable terms in the private capital market. The Bank has interpreted this provision to refer to the extent of a country’s access to private markets for meeting its overall borrowing requirements at reasonable terms. But since “extent of access” and “reasonable terms” are not possible to measure precisely, the Bank has since 1973 used a per capita GNP benchmark as a proxy for the level of development that should normally warrant detailed consideration of graduation.

In practice, this guideline has been applied quite flexibly. By the time they actually graduated from Bank lending, nearly all of the countries mentioned above had per capita incomes substantially above that benchmark, even after adjusting for inflation. As overall constraints on the Bank’s resources have increased in recent years, there has been a need to review the Bank’s graduation policies. This was done at the recent Board meeting.

IBRD loans are repayable over a 15–20 year period, with interest currently at 11.6 per cent a year and an annual commitment charge of 0.75 per cent on undisbursed balances; the loans also carry a one-time front-end fee of 1.5 per cent on the amount of the loan.

IDA credits are for 50 years, including 10 years grace; they carry no interest but bear a small annual service charge—0.5 per cent on the undisbursed balances of the credit and 0.75 per cent on the disbursed balances.

Graduation from IDA to IBRD

The principal criteria for International Development Association (IDA) eligibility are also well established. These are lack of sufficient creditworthiness to meet capital requirements on commercial terms and per capita GNP below an established ceiling. The current per capita GNP ceiling for eligibility is $730 at 1980 prices, although in recent years the great bulk of IDA resources (nearly 90 per cent) has been allocated to countries with per capita incomes below $400.

A complete list of IDA graduates is shown in Table 2. Several of these countries, such as Jordan, Mauritius, and Paraguay, have been graduated because their income had exceeded the IDA eligibility level, while others such as Egypt, Indonesia, and Thailand were graduated because their creditworthiness reached a point where they could service loans on International Bank for Reconstruction and Development (IBRD) terms.

Table 2Past IDA borrowers
CountryYear ol last IDA credit

(Fiscal year)
Chile1961
Colombia1962
Costa Rica1962
Nigeria1965
Dominican Republic1973
Ivory Coast1973
Korea1973
Turkey1973
Botswana1974
Ecuador1974
Syria1974
Mauritius1975
Morocco1975
Swaziland1975
El Salvador1977
Paraguay1977
Tunisia1977
Jordan1978
Philippines1979
Thailand1979
Indonesia1980
Cameroon1981
Egypt1981
Source: World Bank.
Source: World Bank.

Countries will continue to graduate from IDA to IBRD lending. If the drastic reduction of resources continues (from the level of $4.1 billion originally planned for fiscal year 1982), the graduation process will have to be accelerated at a faster than desirable pace. Substitution of IBRD funds for IDA does not, however, offer a means of meeting the needs of most IDA countries, since few are sufficiently creditworthy to permit significant substitution and none could afford to borrow IBRD funds in amounts equal to current IDA lending.

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