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Mobilizing Resources for IDA: The Ninth Replenishment

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
January 1990
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The process and the issues behind the largest replenishment in IDA’s history

On January 30, 1990, the Executive Directors of the International Development Association (IDA) approved a report and a resolution to be sent to the Board of Governors for the adoption of the Ninth Replenishment Agreement. The IDA 9 agreement provides for donor contributions of SDR 11.68 billion ($15.1 billion at December 14, 1989 exchange rates) over the three-year period fiscal years 1991–93. These donor resources, together with grant cofinancing from Switzerland and the use of about SDR 1.58 billion in repayments (“reflows”) of IDA credits will enable IDA to commit SDR 13.26 billion ($17.1 billion) over three years—an increase in SDR terms of 15 percent over the IDA 8 period.

IDA came into being in September 1960. Following the initial capitalization of $757 million in 1960, IDA has been replenished nine times. It now has 138 members, of which 31 participated in the ninth replenishment as donors.

Although the concessional funds of the regional development banks and funding under the European Community’s Lomé Agreement have grown rapidly, IDA remains the largest multilateral source of concessional funding to low-income developing countries, accounting for almost 50 percent of such commitments. IDA lends almost exclusively to the poorest countries—98 percent of IDA’s disbursements during 1985–86 went to countries with a per capita GNP below $580. It operates in all regions and finances projects in many sectors (see box on IDA lending). In its lending, IDA has had, and will retain, a strong focus on poverty reduction.

Unlike the International Bank for Reconstruction and Development (IBRD), which relies on market borrowing, IDA is funded by grants from donors and by repayments of past IDA credits to carry out its operations. These credits, about three quarters of which are for project financing, are subject to the same rigorous reviews as IBRD loans. The financial terms of IDA credits are, however, much softer than IBRD loans. On average, IDA credits have a grace period of ten years, maturities of 38.3 years (40 years for IDA-only and least developed countries as classified by the United Nations, and 35 years for other recipient countries), and a service charge of 0.75 percent IBRD loans have grace periods of three to five years, maturities of 15–20 years, and a variable interest rate now set at 7.75 percent. The grant element of a typical IDA credit, which measures the degree of its concessionality, is about 80 percent.

The negotiation process

The triennial negotiations to replenish IDA resources have always been a lengthy process, spanning 12–16 months. Since the amounts involved are large, contributions, while voluntary, must be put in a context of equitable burden sharing, and donors have diverse objectives, which must be reconciled, consistent with the developmental mandate of IDA.

The negotiations for the ninth replenishment started with a preliminary meeting of the IDA Deputies (representatives of the donor countries) at the Annual Meetings in Berlin in 1988. The first formal meeting of the Deputies took place in Washington, DC in February 1989. Subsequent meetings were held in London, Copenhagen, Washington, DC, Kyoto, and finally again in Washington, DC on December 14, 1989. Deputies from the 31 donor countries and the representative from Switzerland participated.

The IDA negotiations are chaired by the Association. The Deputies are experienced officials of finance or aid ministries, most of whom have been involved with several IDA negotiations. They play a complex role, critical to the successful outcome of the negotiations. They are designated to work out an agreement to continue adequate funding for an institution to which their governments are committed, and must, therefore, satisfy themselves as to what constitutes a reasonable assessment of borrower requirements. But that is only one element of the process; the Deputies must be able to persuade their governments, aid ministries, and budgetary officials, often managing constrained budgets, to commit resources to IDA in competition with many other claims on aid resources. Deputies also wish to ensure that the size of their government’s contribution is appropriate in the context of other contributions. These three interacting aspects of the Deputies’ work define the negotiating framework.

Operational objectives

The discussions on IDA 9 started with a review of IDA’s programs and there was broad support for the way IDA’s role has evolved in recent years. It was agreed that IDA should give the highest priority in its operations to:

  • poverty reduction;

  • support for sound macroeconomic and sectoral policies; and

  • the environment.

Poverty reduction remains central to IDA’s mandate. The Deputies encouraged an even stronger emphasis on poverty reduction in IDA’s programs, and emphasized that poverty reduction should receive special attention in countries with adjustment programs. They stressed the importance of continuing to focus on the poorest countries and on the poorest sections of the population. Poverty reduction should be an integral part of operations in all sectors. To underline their concern, the Deputies urged that greater weight be given to poverty alleviation as a performance criterion in allocating IDA resources to countries. Moderating the rate of population growth, improving health and nutrition services, expanding education and training opportunities, and increasing the benefits of development for women, are seen as central to raising the productivity of the poor and increasing their economic mobility. The Deputies welcomed the proposed expansion in the share of lending for human resources during the IDA 9 period.

In the context of supporting long-term sustainable growth and poverty reduction, the Deputies underlined the importance of sound macroeconomic and sectoral policies as a basis for effective use of IDA funds in all recipient countries. ID A resources are scarce, and their effective use is central to long-term political support for IDA in the donor community. While the Deputies consider it important that IDA continue to support adjustment programs, both through quick disbursing adjustment lending and investment credits, they noted IDA’s traditional strengths in project design, supervision, and institution building, and urged that investment lending should continue to be the mainstay of IDA’s activities.

IDA lending, FY1985—89

In the 30 years of its existence, IDA provided 2,183 credits through December 1989, totaling $54,784 million to 86 countries. Of these, $38,021 million have been disbursed and $16,763 million is yet to be disbursed. IDA commitments by sectors and regions for the last five years are shown below:

IDA 7IDA 8
(FY1985-87)(FY1988-89)
(In percent)
By sectors
Agriculture and rural development3532
Education107
Population, health, and nutrition34
Water supply and sewerage53
Energy and power97
Industry and finance47
Transport and telecommunication1314
Urban development69
Other11517
Total100100
By region
Africa3649
Asia5344
IBRD and IDA blend3530
IDA only1814
Other117
Total100100

Includes structural adjustment credits. The share of quick disbursing IDA credits was 14.4 percent of IDA 7 and 23.4 percent in the first two years of IDA 8.

Includes structural adjustment credits. The share of quick disbursing IDA credits was 14.4 percent of IDA 7 and 23.4 percent in the first two years of IDA 8.

Since it is critical to support the supply response to adjustment measures being undertaken by many of the low-income countries, the Deputies asked the management to ensure adequate levels of financing for infrastructure and productive sectors. They also emphasized the need to maintain an appropriate balance between quick disbursing adjustment lending and investment lending, which are seen as mutually reinforcing, and recommended that the share of quick disbursing adjustment lending remain at 25 percent, but in any event not exceed 30 percent, during the IDA 9 period. The Deputies also stressed the importance of collaboration between IDA and the International Monetary Fund, so that the two institutions could provide effective and mutually consistent support to recipient countries in the design and implementation of adjustment programs.

In the third priority area, the environment, the Deputies welcomed IDA’s efforts at the country, sector, and project levels and noted the progress already made. Efforts to integrate environmental issues, such as sound management of forestry resources and energy efficiency and conservation, in the policy dialogue and to ensure that investment projects and adjustment programs support positive environmental actions and minimize potentially harmful effects were seen to be important. The Deputies also endorsed IDA’s intention to complete environmental action plans for all IDA borrowers during the IDA 9 period.

At the project level, environmental assessments for those projects where the impact is expected to be significant will ensure a rigorous technical review at a sufficiently early stage of project preparation to integrate the environmental impact in decisions on site selection and project design. In preparing these environmental assessments for such IDA projects, affected citizens and relevant local nongovernmental organizations would be consulted at the analytical stage and when conclusions have been reached. When the local groups are advised of the government’s conclusions, the borrower would make its environmental assessment available to the Executive Directors for information.

The size of IDA 9

After reviewing the prospects for the low-income countries and the role they expected IDA to play, the Deputies turned to the size of the ninth replenishment. There was general agreement that IDA’s resources would have to be expanded substantially for IDA to support effectively accelerated growth and adjustment in the low-income countries, and to undertake its enlarged responsibilities on the environment and in human resource development. The Deputies decided to seek the largest feasible replenishment consistent with the need for a reasonable burden sharing among donors. Discussions started with a review of IDA’s response capacity under two illustrative scenarios. Alternative lending levels and patterns were examined, as well as operational criteria for IDA eligibility. The scenarios provided reference points for the Deputies within which to reconcile the needs of IDA borrowers, the operational responsibilities assigned to IDA, and their government’s own budget realities. As a first step, the Deputies considered eligibility.

…IDA remains the largest multilateral source of concessional funding to low-income developing countries, accounting for almost 50 percent of such commitments.

Eligibility for IDA borrowing. The historic eligibility ceiling, converted to 1987 dollars, is $940 per capita, but scarcity of resources has long limited access to IDA resources to countries with per capita incomes less than $580 (in 1987 dollars). This is referred to as the “operational cut-off” for IDA eligibility. The Deputies recognized that the operational cut-off was arbitrary and that countries moderately above this level might warrant concessional financing. However, it is reasonable to expect that adjustment efforts will expand and deepen, investment levels will gradually increase, and expanded funding for human resource development and the environment would receive high priority. As a result, even the requirements of the currently eligible countries were unlikely to be met fully. In addition, the Deputies attached great importance to retaining IDA’s focus on the poorest countries, which has been its basic feature and which is important to public support for IDA. They, therefore, decided to retain the current operational cut-off, with the proviso that IDA should have flexibility, in exceptional cases, to extend eligibility temporarily to countries undertaking adjustment efforts even if they are above the operational cut-off.

Allocation. Within the preceding general eligibility criteria, the Deputies endorsed the continued use of the existing allocation criteria (i.e., relative poverty, country size, lack of creditworthiness, and the capacity to use resources effectively). They expressed their support for the increased emphasis IDA has given to performance in recent years and stressed that it should continue to be a key factor in allocating resources to individual countries. Performance comprises three main components: sound economic management; progress toward growth with equity and poverty reduction; and efforts toward sustainable long-term development. They underlined the importance of applying the allocation universally and objectively, while giving due consideration to the individual circumstances of the recipient countries so that IDA’s global character is maintained. Since the use of performance criteria would yield an unacceptably large share for China and India, the Deputies recommended that, in line with the past replenishments, the share of these two countries be limited to a maximum of 30 percent of total replenishment resources, assuming that their performance warrants this level of support.

The allocations by region were also reviewed. While it is both necessary and desirable to sustain high priority programs developed during IDA 8 for Sub-Saharan Africa, Deputies also wished IDA to provide consistent support for adjustment and other long-term development programs for low-income countries elsewhere. They noted that if performance continues as at present, Africa’s share of between 45 to 50 percent of IDA resources would continue to be appropriate. But it was also agreed that flexibility in allocating resources among regions was necessary, based on universal allocation criteria.

Burden sharing

With the operational objectives, eligibility, and allocation criteria agreed, the total size of IDA 9 and the relative contributions of the individual donors remained to be decided. After protracted discussions, the Deputies agreed to recommend a replenishment of SDR 11.68 billion, thus maintaining the real value of the IDA 8 replenishment. Agreeing on the equitable distribution of this total among the donors still turned out to be troublesome. Burden sharing has been a basic and accepted principle of all IDA negotiations; but it has been very difficult to agree on what constitutes equitable burden sharing in the IDA context. A wide range of objective indicators are used, yet no single indicator yields either unequivocally sensible results or can be agreed to be the most relevant. A combination of indicators provides broad guidance, but, in the final analysis, the determination of relative shares remains a matter for negotiation.

Burden sharing(In percent)
Initial

(1961–64)
IDA 81

(1988–90)
IDA 92

(1991–93)
United States42.3425.0021.61
Japan4.4418.7018.70
Germany. Fed. Rep. of7.0011.5011.00
France7.007.307.30
United Kingdom17.336.706.70
Italy2.405.305.30
Canada5.005.0034.75
Netherlands3.673.303.00
Sweden1.332.622.62
Saudi Arabia0.053.252.50
Australia2.671.991.99
Belgium1.091.681.55
Norway0.891.421.42
Denmark1.161.301.30
Finland0.510.801.00
Others3.124.149.264
Total100.00100.00100.00

Shares in the Basic IDA 8 replenishment Supplementary contributions and grant cofinancing from Switzerland are excluded.

Individual donor shares refer to their basic contributions and do not include supplementary contributions which are shown under Others.

Canada’s contribution to IDA 8 includes a basic share of 4.75 percent and a special contribution of 0.25 percent of the basic replenishment.

Also includes supplementary contributions and Switzerland’s grant cofinancing corresponding to 1.58 percent of the replenishment Other IDA 9 donors are Austria, Brazil Greece, Hungary, Iceland, Ireland, Republic of Korea, Kuwait, Luxembourg, Mexico, New Zealand, Poland, South Africa, Spain, Turkey, and Yugoslavia.

Shares in the Basic IDA 8 replenishment Supplementary contributions and grant cofinancing from Switzerland are excluded.

Individual donor shares refer to their basic contributions and do not include supplementary contributions which are shown under Others.

Canada’s contribution to IDA 8 includes a basic share of 4.75 percent and a special contribution of 0.25 percent of the basic replenishment.

Also includes supplementary contributions and Switzerland’s grant cofinancing corresponding to 1.58 percent of the replenishment Other IDA 9 donors are Austria, Brazil Greece, Hungary, Iceland, Ireland, Republic of Korea, Kuwait, Luxembourg, Mexico, New Zealand, Poland, South Africa, Spain, Turkey, and Yugoslavia.

The starting point for discussing shares in IDA 9 financing was the shares of donors in IDA 8. But this base introduced two complications. Since contributions to IDA are generally denominated in national currencies, and since there had been substantial changes in exchange rates in the intervening three years, the use of current exchange rates would have implied either significant changes in the shares of a number of countries, or large changes in their national currency contributions. Countries with currencies depreciating against the SDR—the unit of account for IDA commitments—would have needed to increase their nominal national currency contributions; conversely, countries with appreciating currencies would have had small or no increases. The first group of countries would be faced with severe budgetary problems while the second would not have shared any of the real growth of their economy with IDA. The second complication arose from the large amounts of special contributions made for IDA 8. These contributions had been made on the explicit understanding that they were one-time contributions. But the application of IDA 8 shares, excluding supplementary contributions, would have required contributions from some donors that they considered unrealistic.

The final agreement involved significant changes in the relative contributions of donors (see table on burden sharing). The shares of Belgium, Kuwait, Saudi Arabia, and the United States declined, while the shares of Austria, Finland, and Spain increased. Switzerland, though not a member of IDA, provides grant cofinancing to IDA. It increased its contribution very substantially. Nonetheless, a gap remained. Japan then led an effort to raise the resources needed by offering to provide a special contribution, in addition to its basic share, of up to half the amount of the remaining gap. Special contributions were also made by Finland, France, Ireland, Italy, the Republic of Korea, Spain, and Turkey. Belgium and Italy agreed to accelerate part of their contributions, effectively increasing the value of their contribution and substantially offsetting the reduction in Belgium’s basic share. While the Federal Republic of Germany and the Netherlands reduced their shares, they made special contributions equal to the reduction in their shares. As in previous replenishments, a small unallocated gap remains that may be reduced further through special contributions during the IDA 9 period. This unallocated gap accounts for 0.49 percent of the IDA 9 replenishment, compared with 0.86 percent for IDA 8.

A new feature in the IDA 9 replenishment is the agreement by donors with high inflation rates to denominate their contributions in SDRs. In past replenishments, when these donors provided funds in national currencies, the value of their contributions was eroded significantly, since IDA disbursements extend over many years. For instance, the real value of contributions by high-inflation donors in IDA 8 declined by 0.75 percent of the total IDA 8 replenishment since 1987. To avoid this, it was agreed that all donors with rates of inflation above 15 percent per annum during 1986–88 would be asked to denominate their contributions in convertible currency. However, the level of contributions of these donors was adjusted to take into account the economic difficulties some of them are facing.

Conclusion

The successful conclusion of IDA 9 negotiations has reaffirmed the strong donor support for IDA and the role it is expected to play in the next three years in providing concessional development financing to the poorest countries. The resources provided in the ninth replenishment will enable IDA to continue to be an effective partner in the efforts of its members to reduce poverty and achieve a higher rate of sustainable growth.

Ernest Stern

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