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Georgia—Assessment of the Risks to the Fund and the Fund’s Liquidity Position

Author(s):
International Monetary Fund
Published Date:
October 2008
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1. This note assesses the risks to the Fund arising from the proposed Stand-By Arrangement (SBA) for Georgia and its effects on the Fund’s liquidity, in accordance with the policy on exceptional access 1. The authorities are requesting an 18-month SBA with access of SDR 477.1 million (317.4 percent of quota). A front-loading of SDR 161.7 million (about 108 percent of quota) will be made available upon approval of the arrangement; this would be followed by two quarterly purchases of SDR 63.1 million each, and four quarterly purchases of SDR 47.3 million. The last purchase is scheduled to take place in February 2010 (Table 1).

Table 1.Georgia: Proposed SBA—Access and Phasing
Availability Date 1/Purchases
SDR mn.Percent of quota
AnnualCumulative
2008September (Approval)161.70107.58107.58
November63.1041.98149.57
2009February63.1041.98191.55
May47.3031.47223.02
August47.3031.47254.49
November47.3031.47285.96
2010February47.3031.47317.43
Total477.10317.43317.43

Starting in November 2008, purchases will depend on the completion of a review based on performance criteria for the end of the previous quarter.

Starting in November 2008, purchases will depend on the completion of a review based on performance criteria for the end of the previous quarter.

Background

2. Georgia has had an extensive financial relationship with the Fund since becoming a member in May 1992. Georgia made purchases under a systemic transformation facility (STF) arrangement approved in 1994,2 under a SBA approved in 1995, and under three Poverty Reduction and Growth Facility (PRGF) arrangements during 1996–2007. Total Fund credit to Georgia rose from zero in November 1994 to a peak of SDR 229 million in 2001, and declined gradually thereafter to SDR 145 million by end-July 2008 (Table 2).

Table 2.Georgia: IMF Financial Arrangements, Purchases and Repurchases, 1994-2011(in millions of SDRs)
YearType of New ArrangementDate of ArrangementDate of Expiration or CancellationAmount of New ArrangementAmount DrawnPurchasesRepurchasesFund Exposure 1/
GRAPRGFTotal
1994STF 2/15-Dec-199455.5055.5027.750.0027.750.0027.75
1995SBA/STF28-Jun-199528-Feb-199672.1522.2049.953/0.0077.700.0077.70
1996PRGF28-Feb-199613-Aug-1999172.05172.0555.500.0077.7055.50133.20
199755.500.0077.70111.00188.70
199827.750.6977.01138.75215.76
199933.3015.7361.28172.05233.33
20000.0019.6641.63172.05213.68
2001PRGF12-Jan-200111-Jan-2004108.0049.5027.0012.0332.37196.28228.65
200222.5023.1323.13204.90228.03
20030.0033.7611.56182.70194.26
2004PRGF4-Jun-200430-Sep-200798.0098.0014.0037.002.31168.95171.26
200528.0036.720.00162.54162.54
200628.0033.440.00157.11157.11
200728.0025.940.00159.17159.17
2008 4/0.0014.210.00144.97144.97
2008 5/6/SBA15-Sep-2008477.10224.8022.11224.80137.06361.86
2009 6/205.0017.96429.80119.10548.90
2010 6/47.3014.10477.10105.00582.10
2011 6/0.0038.11456.8987.10543.99
Source: Finance Department

As of end December, unless otherwise indicated.

The IMF established the Systemic Transformation Facility (STF) as a temporary financing window in April 1993 and allowed it to lapse in April 1995.

Includes a second drawing under the 1994 STF of SDR 27.75 million.

As of end July.

Projected as of end December.

Figures under the proposed program in italics.

Source: Finance Department

As of end December, unless otherwise indicated.

The IMF established the Systemic Transformation Facility (STF) as a temporary financing window in April 1993 and allowed it to lapse in April 1995.

Includes a second drawing under the 1994 STF of SDR 27.75 million.

As of end July.

Projected as of end December.

Figures under the proposed program in italics.

3. Georgia’s outstanding obligations to the Fund are all to the PRGF Trust. Credit outstanding under the General Resources Account (GRA) reached a peak of SDR 78 million during 1996-98 but has since been fully repaid. Obligations to the PRGF Trust peaked at SDR 205 million in 2002. Performance under all three PRGF arrangements was strong, particularly in the last arrangement (2004–07) where macroeconomic policies and the overall reform effort were better than envisaged under the program.

4. Georgia’s public debt is mostly external, and the Fund is one of its largest creditors. As of end-2007, Georgia’s public debt was about 22 percent of GDP (US$2.2 billion at current exchange rates); 78 percent of which was owed to foreign creditors (Table 3 and Figures 1a-1b). The World Bank accounted for about half of Georgia’s public external debt, while the Fund’s share was about 14 percent. Georgia’s repayment to the Fund represented about 29 percent of public debt service (15 percent of total external debt service) during 2007. As a share of GDP, Georgia’s public and external public debt are lower than the corresponding ratios in recent exceptional access cases and the current largest users of Fund resources (Table 4). 3

Table 3.Georgia: Public External Debt, 2004-20071/
2004200520062007
(In millions of U.S. dollars)
Public and Publicly guaranteed debt1,8581,7351,6971,790
Multilateral1,1021,0531,1401,263
IMF265233236249
World Bank678679784883
EBRD34303334
Other1261118695
Bilateral753679552519
Paris Club501485424429
Non-Paris Club25219412891
Commercial3368
Memorandum Item
Total external debt2,0932,3283,136
(In percent of total public external debt)
Public and Publicly guaranteed debt100.0100.0100.0100.0
Multilateral59.360.767.170.5
IMF14.313.413.913.9
World Bank36.539.146.249.4
EBRD1.81.72.01.9
Other6.86.45.05.3
Bilateral40.539.132.529.0
Paris Club27.028.025.023.9
Non-Paris Club13.611.27.55.1
Commercial0.10.20.30.4
Source: Georgian authorities and IMF staff estimates

End of year. Public sector is defined as the non-financial public sector and the central bank.

Source: Georgian authorities and IMF staff estimates

End of year. Public sector is defined as the non-financial public sector and the central bank.

Figure 1a.Georgia: Total External Debt by Creditor Group

(end-December 2007) (Nominal Stock: US$3,136 million)

Figure 1b.Georgia: Public External Debt by Creditor Group

(end-December 2007) (Nominal Stock: US$1,790 million)

Source: Public sector debt data are from the Ministry of Finance and private sector debt data are based on a recent survey by the National Bank of Georgia.

Table 4.Public Debt Ratios in Recent Exceptional Access Cases and Current Largest Borrowers from the Fund 1/(in percent of GDP)
Total Public

Debt
Public External

Debt
Debt to IMF
A. Exceptional Access
Argentina (2003)149.487.311.9
Brazil (2003)85.923.65.4
Turkey (2005) 2/71.619.54.0
Uruguay (2005)75.861.715.2
B. Current Largest Borrowers 3/
Turkey (2007) 2/41.411.21.1
Dominican Republic (2007)39.321.41.5
Liberia (2007)774.2709.3116.6
Sudan (2007)60.04/3.5
Georgia (2007)22.417.52.5
Source: Board Documents and IMF staff estimates.

Ratios for the year indicated in parenthesis. For countries in panel A, year in parenthesis corresponds to the year of approval of the last IMF arrangement.

For Turkey, ratios are in percent of GNP.

Countries with the largest Fund exposure as of end August 2008.

Total external debt.

Source: Board Documents and IMF staff estimates.

Ratios for the year indicated in parenthesis. For countries in panel A, year in parenthesis corresponds to the year of approval of the last IMF arrangement.

For Turkey, ratios are in percent of GNP.

Countries with the largest Fund exposure as of end August 2008.

Total external debt.

5. Georgia’s sovereign risk spread has widened sharply since the start of the armed conflict in early August. While the country has relied mostly on FDI flows to finance its growing current account deficit and government borrowing from nonconcessional sources has been limited, in April of this year Georgia issued its first Eurobond (for US$500 million) to set a benchmark for the sovereign spread (Figure 2). With the eruption of the conflict the secondary market spread on Georgia’s Eurobond increased to a level that is currently some 300 basis points above the EMBI average, and 100 basis points above the spread on Ukraine’s debt (which had the same price as Georgia’s debt the month prior to the conflict). Spreads on privately issued debt (mainly from commercial banks) have increased even more and are currently some 700 basis points above the sovereign spread.

Figure 2.Secondary Market Yields - 2008

(in percent)

Source: Bloomberg and Finance Department

1/ Composite bond yield for all emerging market countries (does not include Georgia).

2/ Yield on 5-year US dollar denominated bond issued in April 2008 at a coupon rate of 7.5 percent. Up to August 2008 the cost of Fund credit for Georgia was 0.5 percent, the PRGF interest rate.

3/ Yield on EMBIG US dollar denominated Ukraine bonds.

The New SBA—Risks and Impact on the Fund’s Finances

6. If the proposed SBA is drawn in full, Georgia’s total outstanding use of Fund resources will reach almost 6 percent of GDP. More than 80 percent of this amount will be from the GRA (Table 5). Georgia’s outstanding use of Fund resources in terms of GDP would be lower than the comparable ratios for recent exceptional access cases after their last arrangement was approved (see Table 4, Panel A). However, if the SBA is fully drawn, Georgia’s outstanding use of Fund resources relative to GDP will be higher than in three of the four current largest users of Fund resources; of this group, only Liberia will owe more to the Fund relative to GDP than Georgia (Table 5).

Table 5.Fund GRA Exposure to Current Largest Borrowers 1/
In SDR MillionsIn Percent of Total

GRA credit
In Percent of QuotaIn Percent of GDP
Turkey 1/6,037.578.9506.81.33/
Dominican Republic 1/350.24.6160.01.4
Liberia 1/342.84.5265.365.7
Sudan 1/220.92.9130.22.5
Georgia 2/477.16.2317.44.7
Sources: Finance Department, Board documents, and IMF staff estimates.

As of end August 2008.

Assuming the proposed SBA is drawn in full. Ratio to GDP based on staff report projections for GDP in 2010

In percent of GNP.

Sources: Finance Department, Board documents, and IMF staff estimates.

As of end August 2008.

Assuming the proposed SBA is drawn in full. Ratio to GDP based on staff report projections for GDP in 2010

In percent of GNP.

7. With the proposed SBA, the Fund’s share of Georgia’s public external debt could increase significantly. If the SBA is fully drawn, Georgia’s outstanding use of Fund resources would account for 24 percent of public external debt by February 2010 (outstanding use of the Fund’s GRA resources would account for more than 80 percent of this share). At the end of the proposed SBA, the share of Georgia’s outstanding use of Fund resources in its public external debt would be higher than in most other recent exceptional access cases (Table 6). In terms of external debt service, Georgia’s projected repayments to the Fund would rise from 22 percent of public external debt service in 2008 to over 40 percent in 2011 and close to 70 percent in 2012 (Table 7). This is a significantly higher ratio than applied in other recent exceptional access cases, where repayments to the Fund represented less than ⅓ of total public external debt service.

Table 6.Fund’s Share in Public Debt in Recent Exceptional Access Cases 1/(in percent)
Public External

Debt
Total Public

Debt
Public External

Debt Service
Argentina15726
Brazil22628
Turkey22933
Uruguay262234
Georgia 2/242229
of which: GRA201815
Source: IMF staff estimates.

Argentina, Brazil, Turkey and Uruguay. Figures reported correspond to 2004, the year before three of the four countries (Argentina, Brazil, and Uruguay) made advance repayments to the Fund.

Ratio of outstanding PRGF loans plus the full amount of the proposed SBA to staff projection of public debt in 2010. Debt service figure is the average through 2010 (see Table 7).

Source: IMF staff estimates.

Argentina, Brazil, Turkey and Uruguay. Figures reported correspond to 2004, the year before three of the four countries (Argentina, Brazil, and Uruguay) made advance repayments to the Fund.

Ratio of outstanding PRGF loans plus the full amount of the proposed SBA to staff projection of public debt in 2010. Debt service figure is the average through 2010 (see Table 7).

Table 7.Georgia—Impact on GRA Finances(in millions of SDRs, at end of period unless otherwise noted)
200820092010201120122013
Exposure
Fund GRA credit outstanding to Georgia 1/224.8429.8477.1456.9303.190.7
Fund GRA credit outstanding to Georgia (percent of total GRA credit outstanding) 2/2.0
Fund GRA credit outstanding to five largest debtors (percent of total GRA credit outstanding) 3/93.1
Liquidity
One-year Forward Commitment Capacity (FCC) 4/127,900.0
Georgia’s impact on FCC 5/(477.1)
Prudential measures
Fund GRA credit outstanding to Georgia (percent of current precautionary balances) 6/3.26.26.96.64.41.3
Georgia’s annual GRA charges (percent of Fund’s residual burden sharing capacity)3.322.334.635.630.415.8
Memorandum items
Georgia’s GRA credit outstanding (percent of total public external debt) 7/12.918.820.019.113.14.2
Georgia’s GRA credit outstanding (percent of GDP) 7/2.74.94.84.12.40.6
Georgia’s GRA credit outstanding (percent of gross international reserves) 7/28.438.838.935.022.36.9
Georgia’s GRA debt service to the Fund (percent of exports of goods and services) 7/0.10.50.71.24.75.5
Georgia’s total debt to the Fund (percent of total public external debt) 7/8/20.824.124.422.716.06.5
Georgia’s debt service to the Fund (percent of total public external debt service) 7/8/22.028.129.740.869.136.2
Fund’s precautionary balances 6/6,938.6
Fund’s residual burden sharing capacity 9/60.2
Projected payment of charges to the Fund on GRA credit outstanding2.013.520.821.418.39.5
Projected debt service payments to the Fund on GRA credit outstanding2.013.520.841.7172.1222.0
Source: Finance Department and IMF staff estimates.

The figures do not include SDR 138.86 million (92.39 percent of quota) in PRGF loans outstanding at mid-August 2008 (except for two rows in the memorandum items).

Fund credit to Georgia includes the purchase of SDR 161.70 million upon approval of the proposed SBA. Total GRA credit oustanding is equal to the total as of August 22, 2008, plus the purchase of SDR 161.70 million upon approval of the proposed SBA.

The numerator and the denominator include the purchase of SDR 161.70 million by Georgia upon approval of the proposed SBA.

The Forward Commitment Capacity is a measure of the resources available for new financial commitments in the coming year, equal to usable resources plus repurchases one-year forward minus the prudential balance.

A single country’s negative impact on the FCC is defined as the country’s sum of Fund credit and undrawn commitments minus repurchases one-year forward.

As of end-April 2008.

Staff projections for total public external debt, GDP, gross international reserves, and exports of goods and services, as used in the staff report that requests the proposed SBA.

Total debt to the Fund comprises balances outstanding on GRA credit and PRGF loans (see footnote 1).

Burden-sharing capacity is calculated based on the floor for remuneration at 85 percent of the SDR interest rate. Residual burden-sharing capacity is equal to the total burden-sharing capacity minus the portion being utilized to offset deferred charges.

Source: Finance Department and IMF staff estimates.

The figures do not include SDR 138.86 million (92.39 percent of quota) in PRGF loans outstanding at mid-August 2008 (except for two rows in the memorandum items).

Fund credit to Georgia includes the purchase of SDR 161.70 million upon approval of the proposed SBA. Total GRA credit oustanding is equal to the total as of August 22, 2008, plus the purchase of SDR 161.70 million upon approval of the proposed SBA.

The numerator and the denominator include the purchase of SDR 161.70 million by Georgia upon approval of the proposed SBA.

The Forward Commitment Capacity is a measure of the resources available for new financial commitments in the coming year, equal to usable resources plus repurchases one-year forward minus the prudential balance.

A single country’s negative impact on the FCC is defined as the country’s sum of Fund credit and undrawn commitments minus repurchases one-year forward.

As of end-April 2008.

Staff projections for total public external debt, GDP, gross international reserves, and exports of goods and services, as used in the staff report that requests the proposed SBA.

Total debt to the Fund comprises balances outstanding on GRA credit and PRGF loans (see footnote 1).

Burden-sharing capacity is calculated based on the floor for remuneration at 85 percent of the SDR interest rate. Residual burden-sharing capacity is equal to the total burden-sharing capacity minus the portion being utilized to offset deferred charges.

8. If all purchases are made as scheduled, Georgia’s outstanding use of Fund resources would slightly exceed the cumulative access limit (300 percent of quota) towards the end of the proposed SBA (Table 2, Figure 3). Georgia’s outstanding use of the Fund’s GRA resources would reach 317 percent of quota in February 2010, and remain at this level through November 2011. 4 In terms of quota, this peak borrowing would be significantly smaller than in other recent exceptional access cases. Repurchases with respect to the proposed SBA would be subject to surcharges of 100 basis points over the adjusted rate of charge on the credit outstanding exceeding 200 of quota from May 2009 to January 2013, and to surcharges of 200 basis points on the credit outstanding exceeding 300 percent of quota (SDR 25 million) from February 2010 to November 2011.

Figure 3.Fund Credit Outstanding in the GRA Around Peak Borrowing 1/

(in percent of quota)

Source: IFS, IMF staff estimates, Finance Department

1/ Peak borrowing is defined as the highest level of credit outstanding for a member, in percent of quota. Month t represents the month of the highest historical credit outstanding (in percent of quota). For Argentina t is September 2001; for Brazil, September 2003; for Turkey, April 2003 and for Uruguay, August 2004. For Georgia, t would be reached in February 2010. For comparability, all projected repurchases are assumed to be on an obligations basis.

2/ Projected repurchases (on an obligation basis) as of May 2005. Schedules do not show large early repurchases made by Argentina, Brazil and Uruguay in 2005-06.

9. Georgia’s repayments to the Fund could increase significantly as a result of the proposed SBA. Georgia’s scheduled repayments to the PRGF will average SDR 18 million (12 percent of quota) per annum for the next several years. If fully drawn, the projected service under the proposed 18-month SBA would average SDR 160 million (107 percent of quota) in 201214.5 As a result, total payments to the Fund would average close to SDR 180 million in 2012–14, compared with an average of about SDR 30 million in recent years. The repayment of the recently issued US$500 million Eurobond, which matures in 2013, would put further strains on Georgia’s external debt servicing capacity, unless the government manages to rollover its debt with private creditors.

10. Against this background, the main risks to Georgia’s capacity to repay the Fund include:

  • A greater-than-anticipated slowdown in private capital flows. Georgia’s near-term macroeconomic stability hinges on avoiding net outflows of private capital and/or large losses of reserves and catalyzing a recovery in the medium term. If the recent conflict turns out to have greater (or longer lasting) adverse effects on FDI flows (the main driver of private capital flows in Georgia) than envisaged in the program, the balance of payments position, and consequently Georgia’s capacity to repay the Fund, will be weaker.

  • A further deterioration of banks’ balance sheets. Banks’ large exposure to the real estate sector and their high liability dollarization (both in their deposit base and for wholesale financing) make them particularly vulnerable, especially in view of the strong credit expansion of recent years. A further loss of confidence from depositors or external creditors may exacerbate those vulnerabilities, put pressures on the capital account, reserves and the exchange rate, and give rise to significant liabilities for the government.

  • Weak program implementation. Notwithstanding Georgia’s track record of sound macroeconomic management, new political realities and/or increased domestic tensions, including pressures to support the banking system or other sectors affected by the conflict, will create challenges for continued fiscal restraint and non-inflationary financing of government expenditures.

  • An escalation of regional or domestic tensions. Continued or recurrent bouts of violence and political uncertainty would have adverse effects on Georgia’s balance of payments above and beyond their impact on investors’ confidence, disrupting normal economic activity and foreign trade flows.

  • A less benign external environment. Adverse shocks to Georgia’s terms of trade or to the global or regional supply of FDI, or a weakening of external demand could lead to a deterioration in Georgia’s balance of payments position and its capacity to repay the Fund.

11. The authorities’ resolve to implement the policies contemplated in the proposed SBA provides a key safeguard to Fund resources. As noted, the authorities have a strong track record of Fund program implementation. Looking ahead, adhering to their track record of prudent fiscal and monetary policies and economic reform, and developing the capacity to respond quickly to a larger-than-envisaged deterioration of the balance of payments, will be key to limiting the risk of severe balance of payments pressures and/or a financial crisis.

12. The impact of the proposed SBA on the Fund’s liquidity position will be modest. The proposed SBA would reduce the one-year forward commitment capacity (FCC) by SDR 477 million, about 0.4 percent of the FCC as of end-August—SDR 127.9 billion (see Table 7).6

13. The potential GRA exposure to Georgia is also moderate in relation to the current level of reserves. As a share of the Fund’s current level of precautionary balances, outstanding GRA credit to Georgia would be 3 percent in December 2008 and rise to close to 7 percent by December 2010.

14. In an environment of low credit, arrears incurred by Georgia on the charges accruing to its GRA obligations could put significant strain on the Fund’s burden sharing mechanism.7 Charges on the new GRA obligations will average about SDR 19 million per annum over the next three years. This is equivalent to about 31 percent of the Fund’s residual burden-sharing at mid-August 2008. Burden sharing such arrears would imply an increase in the rate of charge of about 12 basis points.8

Assessment

15. There are significant financial risks associated with the proposed arrangement for Georgia. Although the size of the credit is relatively small (in SDR terms) and Georgia’s outstanding use of Fund resources will account for a small share of the Fund’s GRA credit outstanding, there are many factors that may affect adversely, and quickly, Georgia’s balance of payments and its capacity to repay the Fund. Those factors include a sudden stop of capital flows (FDI or external credit lines to banks), renewed bouts of deposit withdrawals, renewed hostilities, and heightened social tensions and political uncertainties. Any one of these factors, in isolation, can lead to large loss of reserves and a currency and/or financial crisis. Georgia’s capacity to repay the Fund could be substantially impaired in such a scenario. A quick and peaceful resolution of regional tensions, and the authorities’ resolve to adhere to the policies contemplated in the proposed SBA will be key to mitigating those risks.

16. Georgia’s capacity to repay the Fund hinges on maintaining a viable external position. This will require policies to significantly reduce the external current account deficit, continue attracting non-debt creating capital flows and re-build reserves. Continued adherence to prudent macroeconomic policies and progress on economic reform, including through timely policy responses to possible new shocks are necessary conditions, and key safeguards, for this outcome.

See Public Information Notice No. 03/37, 3/21/03

The IMF established the STF as a temporary financing window to provide assistance to member countries facing balance of payments difficulties arising from severe disruptions on their traditional trade and payments arrangements owing to a shift from reliance on trading at non market prices to a multilateral market-based system. The STF was created in April 1993 and allowed to lapse in April 1995.

The recent exceptional access cases used as comparators in this paper are Argentina, Brazil, Turkey, and Uruguay. The 2008 extended arrangement for Liberia also involved exceptional access. However, this arrangement was different from other exceptional access cases since, in this case, exceptional access was needed to repay the bridge loan used to clear Liberia’s arrears to the Fund. For this reason, this paper only groups Liberia with the countries where the Fund had the largest exposure as of end-August 2008 (Turkey, Dominican Republic, Liberia, and Sudan).

Under the obligations schedule, the first repurchase should take place in December 2011, 3¼ years after the first purchase under the arrangement.

These figures correspond to the repurchase schedule on an obligation basis, in line with the guidelines stipulated in Review of Fund Facilities—Proposed Decisions and Implementation Guidelines (http://www.imf.org/external/np/pdr/roff/2000/eng/fusi).

The FCC is the principal measure of Fund liquidity. The (one-year) FCC indicates the amount of quota-based, nonconcessional resources available for new lending over the next 12 months. See The Fund’s Liquidity Position—Review and Outlook (http://www.imf.org/external/np/tre/liquid/2008/0308.htm).

Under the burden-sharing mechanism, the financial consequences for the Fund that stem from the existence of overdue financial obligations are shared between creditors and debtors through a decrease in the rate of remuneration and an increase in the rate of charge, respectively. The mechanism is used to accumulate precautionary balances in the special contingent account (SCA-1) and to compensate the Fund for a loss in income when debtors do not pay charges. The Executive Board has set a floor for remuneration at 85 percent of the SDR interest rate. No corresponding ceiling applies to the rate of charge. The adjustment for the SCA-1 was suspended, effective November 1, 2006, by the Executive Board (Decision No. 13858-(07/1), adopted January 3, 2007).

Residual burden sharing is equal to total burden-sharing capacity minus the amount currently being utilized to offset unpaid charges. The estimated impact is based on the floor for remuneration at 85 percent of the SDR interest rate. The maximum burden sharing capacity at mid-August 2008 was SDR 72.9 million, of which SDR 60.2 million represented the residual capacity. The capacity of the burden sharing mechanism would decline if outstanding credit declines, but would increase with increases in the SDR interest rate.

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