Update on the Financing of the Fund's Concessional Assistance and Debt Relief to Low-Income Member Countries
Author: International Monetary Fund
Publication Date:
17 Apr 2009
eISBN:
9781498336048
Language:
English
Keywords:
PP; SDR equivalent; about SDR; subsidy resource; loan resource; PRGF-ESF reserve account; SDR amount; PRGF-HIPC trust; PRGF-ESF loan; PRGF-ESF credit; PRGF-ESF Subsidy account; commitments to LIC
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This paper provides a semi-annual review of the status of financing for PRGF-ESF lending, subsidization of emergency assistance, and HIPC and MDRI debt relief. The last review was completed by the Executive Board on September 24, 2008. The paper does not address the G-20’s recent call for additional concessional resources, which is discussed in a separate paper.

Abstract

This paper provides a semi-annual review of the status of financing for PRGF-ESF lending, subsidization of emergency assistance, and HIPC and MDRI debt relief. The last review was completed by the Executive Board on September 24, 2008. The paper does not address the G-20’s recent call for additional concessional resources, which is discussed in a separate paper.

I. Introduction and Summary

1. This paper provides a semi-annual review of the status of financing for PRGF-ESF lending, subsidization of emergency assistance, and HIPC and MDRI debt relief. The last review was completed by the Executive Board on September 24, 2008. The paper does not address the G-20’s recent call for additional concessional resources, which is discussed in a separate paper.

2. The main points of the paper are:

Demand projections

  • Demand for the Fund’s concessional financing could average around SDR 2 billion a year in 2009–10 and SDR 1.5 billion a year over the medium term. These projections are consistent with the G-20 communiqué of April 2, supporting a doubling of concessional lending capacity and calling on the Fund to provide US$6 billion (SDR 4 billion) additional concessional financing over the next two to three years.

PRGF-ESF financing

  • Available loan resources are expected to be depleted soon, and additional resources will need to be mobilized urgently. Consistent with short- and medium-term projections, additional loan resources of SDR 9 billion would be required to meet projected demand by low-income countries (LICs) through 2015.

  • Existing subsidy resources could be sufficient to subsidize new PRGF-ESF lending of SDR 4.5 billion. This would likely be able to cover projected demand in 2009–10, as well as accommodate an increase in access limits. However, additional subsidy resources, estimated at about SDR 1.5 billion (end-2008 NPV terms), would need to be identified to cover projected demand through 2015, including for any new LIC facilities.

Subsidization of emergency assistance

  • Available financing is estimated to be sufficient to subsidize existing ENDA/EPCA credit, but additional resources would be needed to meet new requests. The improvement in resource availability reflects sharply lower interest rates and Côte d’Ivoire’s early repurchase of its outstanding EPCA credit, both of which have reduced subsidy needs.

Financing of HIPC-MDRI debt relief

  • Available resources are sufficient to cover the projected cost of debt relief to the remaining HIPCs, except the protracted arrears cases of Somalia and Sudan. There is no provision for debt relief to these cases under the original HIPC/MDRI financing framework. Substantial additional resources would be needed when these countries are ready to embark on the HIPC Initiative. Additional resources could also be needed to provide debt relief to Zimbabwe, which is in arrears to the PRGF-ESF Trust.

II. Financing of Concessional Operations

A. Projected Financing Needs

3. The global financial crisis will likely generate a substantial increase in balance of payments financing needs by LICs.1 Staff’s central projection indicates that demand for concessional financing could rise to an annual average of around SDR 2 billion in 2009–10,2 which is the high-end of the range provided in the earlier paper, and within the range of projected demand if access limits are doubled.3 This would more than double the commitments made to LICs in 2008. Based on country-specific information provided by area departments, a number of countries with large quotas are expected to request new PRGF/ESF arrangements in 2009–10, and many of those with existing arrangements may request augmentations.

4. Over the medium term, demand for concessional assistance could average SDR 1.5 billion a year, well above historical levels. This reflects the likelihood of a protracted fallout from the current global financing crisis, LICs’ increasing exposure to volatility of global growth, commodity prices, and private sector financing, and potential financial requests by the three protracted arrears cases (Somalia, Sudan, and Zimbabwe) once their arrears to the Fund are cleared. 4 Changes in LIC lending facilities could also increase potential demand for concessional financing.

5. Overall, demand for the Fund’s concessional financing could reach SDR 11.5 billion through 2015. This includes projections of an annual demand of around SDR 2 billion in 2009–10 and SDR 1.5 billion in 2011–15 (Table 1). These projections are consistent with the G-20 communiqué of April 2, supporting a doubling of concessional lending capacity and calling on the Fund to provide US$6 billion additional concessional financing over the next two to three years.

Table 1.

Demand Projections, 2009–15

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Excluding the very high level of lending committed to Pakistan in the aftermath of 9/11, and to Liberia in 2008 following arrears clearance.

Assuming exchange rate of US$ 1.5 per SDR.

6. To fully subsidize the projected concessional lending over the short and medium term, additional subsidy resources of about SDR 2.5 billion (end-2008 NPV terms) would be needed. As discussed below, currently available subsidy resources in the PRGF-ESF Trust subsidy accounts are estimated at about SDR 1 billion, while the PRGF-ESF Reserve Account could provide subsidy resources of about SDR 0.74 billion through 2015.5 Therefore, new subsidy resources of about SDR 0.74 billion would need to be identified and secured. Work is underway on options to generate the additional subsidies required to meet resource needs over the medium term.

B. Loan Resources

7. Available PRGF-ESF loan resources stood at SDR 2.5 billion as of end-2008 and have since fallen to SDR 2 billion (Table 2 and Appendix Tables 1 and 2). This includes the commitment made by France to provide a new loan of about SDR 0.7 billion in the context of the ESF. In 2008, new PRGF-ESF commitments to LICs amounted to SDR 0.8 billion, including: (i) SDR 0.5 billion under nine new PRGF arrangements;6 (ii) augmentation of SDR 0.1 billion under twelve existing PRGF arrangements;7 and (iii) ESF financing of SDR 0.2 billion with four countries.8 In the first three months of 2009, new PRGF-ESF commitments amounted to SDR 0.4 billion, including two new PRGF arrangements, two augmentations, and two requests for assistance under the ESF-Rapid Access Component.9 This represents a significant pickup in demand for PRGF-ESF financing compared with recent years (Figure 1).

Table 2.

PRGF-ESF Trust—Loan Resources

(Billions of SDRs; end-2008)

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Includes France’s pledge of US$ 1 billion in the context of the ESF.

Figure 1.
Figure 1.

New PRGF-ESF Commitments, 1988–2008

Citation: Policy Papers 2009, 034; 10.5089/9781498336048.007.A001

8. Additional loan resources would need to be mobilized on an urgent basis. Based on the above projections, additional loan resources of SDR 9 billion (SDR 11.5 billion minus existing SDR 2.5 billion) would need to be secured to cover the projected demand over the short and medium term. Discussions on the mobilization of additional loan resources from bilateral lenders will need to be initiated soon.

C. Subsidy Resources

9. Available subsidy resources for new PRGF-ESF lending are estimated at SDR 1 billion at end-2008 (Appendix Table 3). This excludes SDR 0.3 billion needed to subsidize existing PRGF-ESF loans. These resources include actual balances held in the PRGF-ESF and PRGF-HIPC Trusts, contributions that have been committed but not yet received, including those committed in the context of the ESF. To date, 11 countries have made commitments of SDR 0.2 billion in the context of the ESF fund-raising exercise,10 of which, one third has been received. Given the significant increase in demand for ESF financing, it is important that the remaining amount be received expeditiously (Table 3).

Table 3.

ESF Subsidy Contributions

(Millions of currency units; end-March 2009)

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Calculated using the exchange rates of end-March 2009.

Reflecting net investment income (in end-2005 NPV terms) to be generated from investment/deposit agreements.

10. Based on current projections, available subsidy resources could subsidize new lending of about SDR 4.5 billion. The sharp decline in SDR interest rates has reduced estimated subsidy needs for existing PRGF/ESF credit and new loans, thus allowing available resources to subsidize a higher projected level of new lending than discussed in the last update paper. These estimates do not take into account the pledges made by 10 members (SDR 32 million) in the PRGF-HIPC fund-raising exercise that have not yet been received (Appendix Table 10). It is important that these members make efforts to disburse their pledges as soon as possible.

11. Additional subsidy resources, estimated at about SDR 1.5 billion (end-2008 NPV terms), would need to be mobilized to meet the remaining financing needs (Table 4). While available PRGF-ESF subsidy resources would likely be sufficient to cover new PRGF-ESF lending over the short term, additional resources of SDR 1.5 billion would be needed to meet the projected demand through 2015, including for any new LIC facilities. As discussed below, the PRGF-ESF Reserve Account could cover half of the remaining subsidy needs through 2015, while the rest of SDR 0.74 billion would need to be mobilized through other sources.

Table 4.

Subsidy Needs and Availability

(Billions of SDRs; end-2008 NPV terms)

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Consistent with projected demand for concessional lending of SDR 11.5 billion in 2009–15.

D. PRGF-ESF Reserve Account

12. The PRGF-ESF Reserve Account provides security to bilateral lenders in the event of a delay or non-repayment by borrowers. The Account has been financed by reflows of Structural Adjustment Facility (SAF) and Trust Fund repayments and investment returns on the balances held in the Account. The balances in the Reserve Account stood at SDR 3.8 billion at end-2008, representing a substantial multiple of projected PRGF repayments falling due in the coming 12 months and about 98 percent of PRGF-ESF Trust obligations (Appendix Table 4).

E. Medium-Term Financing Framework

13. It has been envisaged that, once available subsidy resources are depleted, new concessional lending could be subsidized by the resources in the PRGF-ESF Reserve Account on a “self-sustained basis”. Under this approach, which would require an amendment to the PRGF-ESF Trust Instrument and consents of all current Trust lenders, bilateral creditors would continue to provide loan resources that would be on-lent to LICs, while income earned on the balances in the Reserve Account would be used to finance interest subsidies. As under the current framework, the Reserve Account would also continue to provide security to lenders in the event of a delay or non-repayment by borrowers.

14. Staff’s updated projections indicate that the Reserve Account could subsidize annual lending of about SDR 0.7 billion on a sustained basis. This is lower than estimated in the last update, reflecting lower interest rates, which reduce investment income on the Reserve Account balance and its subsidization capacity. These projections are subject to important assumptions regarding the rate of investment earned on the Reserve Account balance, interest rates paid to lenders, resumption of reimbursement of the GRA for PRGF-ESF administrative expenses, and repayments of overdue Trust Fund, SAF, and PRGF obligations by the protracted arrears cases once their arrears are cleared.

15. Additional subsidy resources would be needed to supplement the Reserve Account subsidization capacity and meet LICs’ financing needs over the medium term. As near- and medium-term demand could rise significantly and the Reserve Account would offer limited subsidization capacity, additional subsidy resources, estimated at about SDR 0.74 billion over and above the resources available in the Reserve Account, would be needed to meet the projected demand through 2015.

III. Subsidization of Emergency Assistance

16. The Fund provides emergency assistance (ENDA and EPCA) to help member countries in the wake of natural disasters or as they emerge from conflict. Starting in 2001, bilateral contributions have allowed the Fund to provide such assistance to PRGF-eligible members at a reduced rate of charge of 0.5 percent per annum (plus burden-shared adjustments) (Appendix Table 5).

17. There have been several new developments since the last update. In October 2008, Saudi Arabia effected its commitment made in 2005 to provide US$4 million (SDR 2.7 million) for subsidization of ENDA and disbursed the first half of its contribution. In December 2008, Luxembourg provided a new contribution of Euro 0.54 million (SDR 0.5 million) to the EPCA/ENDA subsidy account.11 On the borrowing side, Comoros requested a purchase of SDR 1.1 million (12.5 percent of quota) under the EPCA. This brings the total number of countries that have benefited from subsidization of ENDA/EPCA to 17 (30 requests) (Appendix Table 6).

18. Based on updated projections, available resources are likely sufficient to subsidize existing ENDA/EPCA credit. This represents a significant improvement over the last update, as lower interest rates reduce estimated subsidy needs. Moreover, in March 2009, Côte d’Ivoire made an early repurchase of its outstanding EPCA credit of SDR 81.3 million, reducing subsidy needs by about SDR 5 million. Additional subsidy resources would, however, be needed to meet new requests for ENDA/EPCA.

IV. Financing of HIPC and MDRI Debt Relief

19. The Fund has, to date, committed SDR 4.6 billion of debt relief to eligible countries. This includes debt relief of SDR 2.3 billion to 35 countries under the HIPC Initiative and SDR 2.3 billion to 26 countries under the MDRI (Appendix Tables 7 and 8).12

20. Since the last update, Côte d’Ivoire and Togo have reached HIPC decision point and Burundi has reached completion point. In addition, the Board has approved additional interim HIPC assistance to four other countries: Central African Republic, Republic of Congo, Haiti, and Liberia.

A. Remaining HIPCs

21. The Fund’s cost of debt relief to the remaining HIPCs is estimated at SDR 0.5 billion, in line with the previous estimate (Table 5).13 Of this amount, the estimated cost associated with those countries identified during the ring-fencing exercise is about SDR 9 million, slightly higher than estimated in the last update.14

Table 5.

Financing of Debt Relief to the Remaining HIPCs

(Billions of SDRs; end-2008 NPV terms)

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Including resources in the HIPC Umbrella account.

22. Available resources in the HIPC/MDRI accounts, at SDR 0.8 billion as of end-2008, are more than sufficient to cover the estimated cost.15 Specifically, available resources in the HIPC account are estimated to exceed the projected needs by about SDR 0.1 billion, largely reflecting lower-than-estimated costs for Côte d’Ivoire and Togo. The two MDRI Trusts are estimated to incur a surplus of about SDR 0.2 billion mainly due to delays in reaching completion point by the Democratic Republic of the Congo. These estimates are based on assumptions regarding the timing of HIPC decision and completion points and the future path of interest rates, which are all subject to uncertainty. Moreover, they do not take into account potential needs for HIPC topping-up assistance, which are difficult to predict.16

23. The estimated cost of debt relief to Liberia remains unchanged, at about SDR 530 million.17 In total, 102 member countries have pledged contributions of SDR 548 million, sufficient to cover the estimated cost. To date, 75 contributors have transferred SDR 400 million of their contributions to the Liberia Administered Account, while 12 others have placed their contributions of SDR 28 million in the PRGF-HIPC Trust. Commitments of SDR 121 million made by the remaining contributors have not yet been received. As Liberia is making progress toward its HIPC completion point, it is important that these contributors make efforts to disburse their commitments expeditiously (Appendix Table 9).

B. Protracted Arrears Cases

24. Providing debt relief to Somalia and Sudan would require substantial additional resources. As of end-March 2009, the total stock of arrears of the two countries to the Fund amounted to SDR 1.2 billion. As the costs for providing debt relief to these countries were not included in the original financing framework of the HIPC Initiative and the MDRI,18 additional financing would need to be identified and secured when these members are ready to clear their arrears and embark on the HIPC Initiative.19 The approach developed for Liberia’s arrears clearance and debt relief, including the financing modalities, could provide a useful framework for Sudan and Somalia at an appropriate time.

25. Additional resources could also potentially be needed to provide debt relief to Zimbabwe, if it were assessed to be eligible. Currently, Zimbabwe is neither PRGF-eligible nor on the list of “ring-fenced” countries that could benefit from the HIPC Initiative. However, when Zimbabwe is ready to clear its arrears to the PRGF-ESF Trust (SDR 89 million at end-March 2009), an assessment would need to be made of Zimbabwe’s eligibility for the HIPC Initiative based on relevant criteria, including whether the NPV of its debt at end-2004 exceeded the HIPC thresholds. Additional resources could be needed to cover any such HIPC and “beyond-HIPC” debt relief for Zimbabwe.

Appendix Table 1.

Summary of Bilateral Contributions to the PRGF-ESF and PRGF-HIPC Trusts

(In millions of SDRs; as of end-December 2008)

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* Less than SDR 5,000.

Subsidy contributions of Bangladesh, Belgium, Czech Republic, India, Luxembourg, Netherlands, Saudi Arabia, Sweden, and Thailand are held in the PRGF Subsidy Account. Tunisia’s contribution is held in both PRGF Subsidy Account and ESF Subsidy Account. All other countries’ contributions are held in the PRGF-ESF Subsidy Account.

Excludes the G-8 commitment of SDR 100 million in end-2005 NPV terms and new ESF subsidy contributions.

Estimated values of total contributions include forthcoming contributions that are not yet received. The term “as needed” refers to the nominal sum of concessional assistance taking into account the profile of subsidy needs associated with PRGF lending and the provision of HIPC assistance, respectively.

Appendix Table 2.

PRGF-ESF Trust—Loan Agreements

(In millions of SDRs; as of end-2008)

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Including additional loan commitments for interim PRGF operations.

Before April 17, 1998, known as Caisse Française de Développement.

In late 1999, the Bank of Italy replaced the Ufficio Italiano dei Cambi as lender to the PRGF Trust.

On October 1, 1999, the Export-Import Bank of Japan merged with the Overseas Economic Cooperation Fund and became the Japan Bank for International Cooperation.

The loan commitment is for the SDR equivalent of US$50 million.

The original loan commitment of the Bank of Spain was SDR 220 million; however, only SDR 216.4 million was drawn and disbursed by the expiration date for drawings.

The full loan commitment of SDR 200 million was drawn in January 1989; this amount was fully disbursed to borrowers by March 1994.

On August 26, 1998, the SFD indicated that it did not intend to make further loans in association with the PRGF.

Any mismatch of outstanding resources between the amount owed by PRGF borrowers and the amount owed to PRGF lenders arises because of mismatches in timing between drawdowns from lenders to the Trust and disbursements of PRGF loans to borrowers.

Appendix Table 3.

PRGF-ESF Trust—Subsidy Agreements 1/

(In millions of SDRs; as of end-2008)

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Subsidy contributions to the PRGF-ESF Trust result from the difference between the investment income on contributions and the below market rate of interest paid to contributors.

In January 2006, the original PRGF Subsidy Account was renamed as the PRGF-ESF Subsidy Account, and two new subsidy accounts, the ESF Subsidy Account and the PRGF Subsidy Account, were established. For deposits/investments that have not yet expired, the current name of the account is presented. For deposits/investments that have been repaid, the old name of Subsidy Account is kept.

Equivalent of US$10 million (at the exchange rate of June 29, 1994).

The Fund made early repayments to Botswana, Malaysia, and Singapore on March 1, 2004.

Interest rate paid is equivalent to the return on investment by the Fund on this deposit (net of any costs), less 2.0 percent per annum. If the interest rate obtained is less than 2.0 per annum, the deposit shall bear zero interest.

All the deposits will be repaid together at the end of sixteen years after the date of the first deposit.

Including (i) a new investment of SDR 38.2 million; and (ii) a rollover of two investments of SDR 49.8 million and SDR 27.9 million and of the deposit of SDR 16.7 million from the PRGF-HIPC Trust upon their maturities in 2011, 2011–14, and 2018, respectively.

The investment coincides with the repayment of each of the first nine (out of ten) semiannual installments of a drawing of the PRGF-ESF Trust loan of SDR 67 million from the Government of Spain (the Instituto de Crédito Oficial).

Equivalent of US$5 million (at the exchange rate of May 11, 1994).

Interest rate paid is equivalent to the return on this investment by the Fund (net of any costs), less 2.6 percent per annum. If the interest rate obtained by the Fund is 2.6 percent per annum or less, the investment shall bear zero interest.

Appendix Table 4.

PRGF-ESF Trust—Reserve Account Coverage

(Millions of SDRs)

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The decline in total PRGF credit outstanding by about 40 percent from 2005 reflects early repayments arising from the delivery of HIPC and MDRI debt relief.

Appendix Table 5.

Subsidy Contributions for Emergency Assistance

(In millions; as of end-March 2009)

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For contributions which have been fully received, the SDR equivalent is the actual SDR amount received using the exchange rate on the value date. For contributions that are not yet disbursed, the SDR equivalent is calculated using the exchange rate at end-March 2009.

Reflecting investment income to be generated on a deposit agreement, effective May 2006.

To subsidize the rate of charge on purchases by Sri Lanka and Maldives under ENDA following the 2004 Tsunami.

Recently the authorities requested to place all their past and future contributions in the joint sub-account for ENDA-EPCA.

Existing contribution, previously earmarked for EPCA.

Appendix Table 6.

Countries that have Benefited from Subsidization of Emergency Assistance 1/

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Subsidization for EPCA and ENDA started in 2001 and 2005, respectively. Cases approved prior to the beginning of subsidization also received interest subsidies on their outstanding credit.

Appendix Table 7.

Implementation of the HIPC Initiative

(Millions of SDRs; mid-April 2009)

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Includes the commitment made in NPV terms plus interest earned on that commitment.

Includes commitment under the original HIPC Initiative.

Including SDR 17 million committed to Côte d’Ivoire under the original HIPC Initiative.

Appendix Table 8.

Debt Relief Following Implementation of the MDRI

(Millions of SDRs; end-March 2009)

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Balances available at the time of MDRI debt relief.

Non-HIPCs but qualified for MDRI debt relief with a per capita income below the US$380 threshold.