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Raising Resources for IDA: The Eighth Replenishment - Changes in key policies; higher financing

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International Monetary Fund. External Relations Dept.
Published Date:
September 1987
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Alexander Fleming and Mary Oakes Smith

The International Development Association, an affiliate of the World Bank, was founded in 1960 to provide concessional long-term financing to its poorest member countries. Like the International Bank for Reconstruction and Development (IBRD), the main organ of the Bank Group, IDA provides assistance to high-priority investment projects and economic adjustment programs. While the terms of IDA are highly concessional, its projects are generally identical in scope and are appraised and implemented with the same rigor as IBRD projects. IDA differs from IBRD in eligibility criteria, terms of lending, and sources of funds.

Currently IDA is the largest single multilateral source of concessional assistance for low-income countries. During 1970-83 it provided 10 percent of the net official development assistance (ODA) flows from members of the OECD’s Development Assistance Committee to countries with 1985 GNP per capita of $790 or less. Within this eligible group, over 80 percent of IDA commitments have been made to countries with 1985 per capita incomes below $400. In 1984-86 this share of IDA commitments increased to 96 percent. As IDA has grown, it has become an increasingly important source of finance in many recipient countries (see box “Flow of IDA credits”). This is especially true for the smaller countries of Africa and Asia, where IDA flows account for a significant portion of investment resources. Particular sectors, such as agriculture, transport, and power, have benefited greatly from IDA credits in these countries. But the impact of IDA extends beyond its contribution to investment financing. The influence of IDA on policy reform, on creating viable development institutions, and on general economic and sector analysis is perhaps its most important contribution to development in member countries.

While IBRD is financed by borrowings in the world’s international capital markets backed by the capital subscribed by member governments, IDA is a fund periodically replenished by donors. Commitments of resources are made throughout the period of the replenishment, although actual disbursements to borrowers, and the corresponding contributions by donors, typically take place over a four-to ten-year period. IDA’s resources are bolstered by reflows from the repayments of outstanding credits and by a periodic transfer of net income from the IBRD.

IDA donors as a group steadily increased their contributions to the Association through the first six replenishments. Then, for the first time, during the Seventh Replenishment, covering 1985-87, the total contributions dropped in both nominal and real terms. This fall reflected a concern in some donor countries about the size of their domestic budgets-especially the aid component-as well as a change in emphasis from multilateral to bilateral support. The Eighth Replenishment, therefore, was important to reaffirm to the development community and recipient countries the commitment of donors to IDA.

The negotiations to provide IDA with the resources it would need over fiscal years 1988-90 culminated in Rome in December 1986. The agreement provided IDA with $12.4 billion, an increase of more than $3 billion over the Seventh Replenishment. The agreement also reflected accord on a number of changes in key policy issues, such as the allocation of resources among main groups of borrowers, the terms of credits, the purposes of lending, and the relative sizes of contributions by donors (burden sharing). In order to gauge the significance of these changes, this article reviews briefly the background of the replenishment process.

The negotiation process

When IDA was established in 1960, donors provided an initial subscription of $750 million. The demand for IDA resources was so great, however, that by 1962 it was clear more funding would be needed much earlier than expected. Members began negotiating a replenishment for the three fiscal years 1965-67, thus establishing the practice of preparing replenishments at three-year intervals.

Flow of IDA credits

IDA has 131 member countries and through June 30, 1986 has extended $39.6 billion in credits to 85 countries. Of the $3.14 billion in credits committed in fiscal year 1986 (July 1, 1985-June 30, 1986), 36 percent went to Sub-Saharan African countries, 45 percent to South Asia, and the remainder else-where. Structural and sector adjustment lending, involving programs of economic policy reform, accounted for roughly half the commitments to African countries by IDA and a Special Facility for Sub-Saharan Africa over the past two fiscal years.

The poorest countries receive IDA credits, or credits from the other concessional facilities exclusively. Those countries with somewhat better creditworthiness receive a blend of IDA and IBRD loans; the latter carry near-market interest rates. Countries which move above an annual per capita income level of $790, and are deemed creditworthy for Bank or commercial market loans, are no longer eligible for IDA credits. To date 28 countries have “graduated” from IDA; three of them, Colombia, the Republic of Korea, and Turkey are now IDA donor countries.

When does IDA8 become effective?

Only when donors have secured the necessary budgetary allocations can IDA begin disbursing its resources. The principle of fair burden sharing applies in the implementation of the replenishment, however, as well as to the negotiations. Donors have tied the release of resources to similar action by other donors.

Under the IDAS agreement donors will deposit with IDA an Instrument of Commitment indicating their commitment to make resources available to the Association. The replenishment, which is due to begin on July 1, 1987, will in practice become effective when IDA receives Instruments from donors representing at least 80 percent of the total replenishment amount. Such notification must also be received from at least 12 developed country donors.

Because the date of effectiveness might be delayed beyond the beginning of a new replenishment, advance contribution schemes have been devised. Under these, donors have agreed to make some proportion of their contributions (usually one third) payable and hence immediately available for commitment on credits prior to the effectiveness of the replenishment. The donors decided to use such a scheme in the context of IDAS. This advance contribution scheme would itself become effective under IDAS once 20 percent of the resources for the basic replenishment have been formally “notified” (committed) by donors.

The negotiation process itself extends over a year or more, depending on the number of issues raised and the complexity of the ultimate agreement. Formal negotiations are chaired by an appointee of the President of the World Bank; the appointee may, or may not, come from inside the Bank. In the IDA8 negotiations the then Senior Vice President for Finance at the World Bank, Moeen A. Qureshi, served as Chairman. The replenishment negotiations were supported by an IDA team in the Financial Studies Division of the Bank.

Each donor country is represented by a designated “Deputy,” who is typically a representative from the treasury or foreign affairs ministry and is empowered to negotiate within the limits defined by his government. These limits are narrowed as the negotiation proceeds. The agreements reached by the Deputies take the form of recommendations for the approval of IDA’s Board of Executive Directors. A report of the IDA negotiations and a draft resolution governing the IDA replenishment is forwarded by IDA’s Executive Directors to the Association’s Board of Governors-normally the finance ministers of member governments or their equivalents-for agreement. The negotiating process has never been easy. The size of the replenishment has always been the focal point of the negotiations and the positions of individual donors have reflected their own economic well-being and political priorities. Questions of burden sharing have often complicated the negotiations, as have the adjustment of voting rights, the terms to be attached to IDA credits, and the allocation of the Association’s funds among the eligible borrowing countries.

The IDA8 negotiations

The IDA8 negotiations began with the disappointment of the IDA7 negotiations fresh in donors’ minds; IDA7’s $9 billion replenishment had been lower than the previous replenishment of $12 billion. From the outset of the IDA8 negotiations there was a very positive tone, characterized by a strong cooperative spirit among the Deputies. The IDA8 negotiations began with all donors reaffirming their support for a strong and adequately financed IDA. There were, nonetheless, divergent views on the size of the replenishment. A range of $10.5-$12.5 billion was established at an early point in the negotiation. This range reflected a balance between the perceived resource needs of the eligible countries over fiscal years 1988-90, and the budget realities of aid availability in many donor countries. Many donors would have preferred a figure above this range but were prepared to accept a figure toward the top end if that meant that the negotiations could be completed expeditiously and an interruption in the flow of resources to borrowing countries could be avoided.

The central issues of size, terms, and allocations were dealt with as a package. Gradually, as the negotiations proceeded, most donors agreed to aim for a replenishment of at least $12 billion. To secure this figure, donors were prepared to accept some hardening of terms. Donors were also prepared to increase IDA’s lending for adjustment support in order to secure broad-based agreement on an increased replenishment.

A number of donors played active roles in marshalling support for the Association and facilitating a successful conclusion to the negotiations. Several donors-among them the Nordic countries, the Netherlands, France, and Italy-promoted a replenishment in excess of $12 billion. The United States played a key role in shaping the package of issues that ultimately led to a basic replenishment of $11.5 billion and it released a part of its share capital in IBRD to accommodate other donors who wanted to increase their shares and were prepared to raise their contributions to IDA to do so. Japan contributed $450 million more than its 18.7 percent share. Together these positive initiatives provided the incentive for other countries to increase their contributions.

The outcome

The main features of the IDA8 replenishment are reviewed below. For a summary of the various implementation arrangements, see box “When does IDA become effective?”

IDA8 size. After extensive deliberations, donors agreed on a basic IDA8 replenishment of $11.5 billion with normal burden-sharing arrangements. Most donors, however, felt that a replenishment at the top end of the negotiating range would better facilitate the adjustment efforts and long-term investments required in many countries. Accordingly, a number of countries agreed to supplement their contributions: Japan, as noted above, provided an additional $450 million; the Netherlands $125.5 million; Italy $90.5 million; Germany $50 million; and the United Kingdom $15 million. The Dutch and Italian supplementary contributions were in addition to increases in their shares in the basic IDA8 replenishment. Canada also agreed to make a special contribution of $28.75 million which was also included in the basic IDA8 replenishment. The supplementary amounts were not made a permanent feature of future burden-sharing arrangements. In addition, Switzerland (not a member of IDA) concluded a bilateral agreement with IDA for $165 million as an untied grant in conjunction with the IDA8 replenishment. These supplementary resources brought the total funds available to IDA during the Eighth Replenishment to $12.4 billion.

Burden sharing. In negotiating the basic $11.5 billion replenishment, donors placed considerable importance on fair burden sharing (see Table 2 for shares of donors). Donors take a range of economic and political considerations into account in determining their shares. The important economic indicators include relative GNP and per capita GNP sizes. In IDA8 the United States and Japan maintained their IDA7 shares: 25 percent and 18.7 percent, respectively. Those of France, Canada, and Italy were increased significantly, while the Nordic countries, the Netherlands, Spain, Austria, New Zealand, and the Republic of Korea also agreed to take larger shares. Japan indicated that greater harmonization of its shareholdings in IBRD and IDA was required and that its IDA7 share in IDA8 could not be maintained without an increase in its share in IBRD. Italy, Canada, the Netherlands, and the Republic of Korea also made increases in their IDA contributions conditional on increases in their IBRD shareholdings. The United States, which held a limited amount of unsubscribed shares, agreed to give up some of its shares to accommodate three of these countries. Under this agreement the United States will release 2 percent of its total IBRD share capital to Japan, Italy, and Canada. Additional shares will also be allocated to the Netherlands and Korea, but from other sources as they become available. Subsequent to the negotiation meetings, Turkey-another former IDA recipient-agreed to contribute to IDA for the first time, with a share in the replenishment of 0.09 percent.

Table 1Replenishment of IDA resources 1961–90

(In millions of US dollars1)

Basic

replenishment
Additional

contribution
Initial (1961–64)757
IDA1 (1965–68)745
IDA2 (1969–71)1,200712
IDA3 (1972–74)2,441
IDA4 (1975–77)4,501
IDA5 (1978–80)7,686462
IDA6 (1981–83)12,0001,9823
IDA7 (1985–87)9,0001,3454
IDA8 (1988–90)11,5008965
Source: World Bank data.
Table 2Changing contributions to IDA(Percentage of total contributions)
Initial

(1961–64)
IDA7

(1985–87)
IDA8

(1988–90)
United
States42.3425.0025.00
United
Kingdom17.336.706.70
France7.006.60730
Germany7.0011.5011.50
Canada5.004.505.00
Japan4.4418.7018.70
Italy2.404.305.30
Nordic
Group3.905.706.17
OPEC0.494.203.47
Others110.1012.6010.86
Source: World Bank data.

Allocation of IDA8 resources. In allocating IDA8 resources among borrowers, donors were guided by established eligibility and allocation criteria. A per capita income of $790 or less in 1985 and lack of creditworthiness remained the key factors. Donors supported the continued use of existing criteria-relative poverty, population size, and economic performance-for allocating resources among regions and countries. They agreed, however, to place greater emphasis on economic performance.

Two aspects of allocations were also discussed: allocations by country group of recipient and by type of lending operation. There was broad support for maintaining both the global character of IDA allocations and the financing of investments for long-term development as the mainstay of IDA operations. At the same time donors gave high priority to increasing resource flows from IDA to Sub-Saharan Africa, especially in support of programs of policy reform. Donors recognized that the problems facing Sub-Saharan Africa were of a protracted nature and would need the sustained support of the donor community. They agreed that a minimum of 45 percent and up to 50 percent of IDA8 resources should be made available to that region, depending on the progress made in their economic adjustment programs.

The donors also agreed to continue to support India and China, which receive a blend of IDA and IBRD funds, as well as other low-income countries outside Africa. Donors believed that despite considerable progress, India and China would continue to need inflows of foreign capital and technology to restructure and modernize their economies. Only by securing adequate concessional financing could they continue to meet their investment requirements and avoid excessive debt-service burdens. Concessional resources were also needed to alleviate persistent poverty in these countries. In nominal terms the donors agreed that India and China should not receive less than they had under IDA7, and that they should receive about 30 percent of IDA8 resources.

The donors, while wanting to maintain IDA as a lender primarily for investment purposes, placed greater emphasis on adjustment support lending in IDA8, especially in Sub-Saharan Africa, to improve the policy environment for investment. Between $3 and $3.5 billion of total IDA8 resources will be used for adjustment support and some of this will be used in conjunction with the IMF’s new structural adjustment facility.

Defining the grant element

The grant element of a credit seeks to measure the concessionality of aid funds, extended at a given set of terms, as compared to the same funds extended as a grant (the benchmark). Five primary factors dictate the degree of concessionary of a credit: its interest rate, maturity, grace period, volume, and the relevant discount rate. The grant element in this article is defined as the difference between the present value of disbursements (disbursements are assumed to be made over an eight-year period) and all debt-service payments, divided by the present value of disbursements.

The change in IDA8 terms. one of the key policy issues discussed was the terms to be attached to IDA8 credits. This issue was closely linked to the size of IDA8. Some donors were prepared to accept a change in IDA’s terms, provided this would enhance the size of the replenishment. Hardening terms, they felt, would lead to a more rapid recycling of IDA resources, thus enhancing the Association’s ability to redirect its funds to areas of greatest need. Donors also generally recognized that IDA terms had grown considerably more concessional since the inception of IDA in 1960. Given that market interest rates were, in recent years, much higher, on average, than those prevailing in 1960, some donors supported restoring the concessionality of IDA credits to its original level.

Donors eventually agreed to reduce final maturities on IDA credits from 50 to 40 years for the least-developed IDA recipient countries-that is, eligible countries with insufficient creditworthiness to have any prospect of receiving IBRD loans or the least less developed countries (LLDCs) according to UN terminology that are IDA borrowers-and to 35 years for other recipients. Grace periods will be maintained, however, at 10 years for all countries. A reduction in final maturities from 50 to 40 years, with the grace period unchanged, will lead to a fall in the grant element from 81 percent to 77 percent (see box “Defining the grant element”). A further reduction in final maturities to 35 years reduces the grant element to 74 percent.

Under the existing terms of a 50-year credit, 55 percent of the face value of an IDA credit would reflow to the Association by the thirty-fifth year. In contrast, with the 40-year credit, 80 percent of the credit would reflow by the thirty-fifth year. With the 35-year credit, of course, all of the credit would be repaid by the thirty-fifth year.

In reviewing IDA terms, donors also expressed concern that some countries that had graduated from IDA and had since made major economic strides still had outstanding IDA credits. Prompted by the importance of recycling IDA funds more quickly to those countries most in need, donors agreed that a provision be introduced for IDA8 credits and beyond that would permit terms to be reviewed and adjusted after a specified period to reflect changes in individual country circumstances. The changes in IDA terms agreed during the negotiations will apply only to credits committed to borrowers during the IDA8 replenishment period and beyond.

Conclusion

Agreement on a satisfactory replenishment was vital if the World Bank Group was to continue to meet the needs of an important group of developing countries: those Sub-Saharan African, Asian, and other countries that are insufficiently creditworthy to borrow from the Bank Group entirely on IBRD terms. IDA is by no means a static institution. It must constantly adapt to changing perceptions of the types of policies and projects that will produce the most effective forms of development. It must direct its resources to countries where the problems of poverty are greatest and where resources can be used most efficiently. It must also adapt to the budgetary constraints in the donor countries that influence the availability of resources to the Association. All of these pressures are reflected, and ultimately resolved, within the replenishment negotiations.

Donors’ budgetary constraints seem unlikely to ease in the near future. New replenishments are likely to follow the course set by the IDA8 negotiations, with continuing emphasis on borrower performance, closer links with policy-based lending, and a greater share of resources being devoted to the least-developed countries.

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