Update on the Financing of the Fund's Concessional Assistance and Debt Relief to Low-Income Member Countries
Author: International Monetary Fund
Publication Date:
24 Sep 2009
eISBN:
9781498335423
Language:
English
Keywords:
PP; SDR; financing; resource; loan; ESF financing; LIC reform package; loan demand; PRGF-ESF reserve account; providing debt relief
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This paper provides a semi-annual review of the status of financing for the Fund’s concessional lending and debt relief to low-income countries (LICs). Since the last review, the Executive Board has approved comprehensive reforms of the Fund’s concessional lending instruments and financing framework. This update is based on data available at end-August and also takes into account the implications of these reforms.

Abstract

This paper provides a semi-annual review of the status of financing for the Fund’s concessional lending and debt relief to low-income countries (LICs). Since the last review, the Executive Board has approved comprehensive reforms of the Fund’s concessional lending instruments and financing framework. This update is based on data available at end-August and also takes into account the implications of these reforms.

I. Introduction and Summary

1 This paper provides a semi-annual review of the status of financing for the Fund’s concessional lending and debt relief to low-income countries (LICs).1 Since the last review2, the Executive Board has approved comprehensive reforms of the Fund’s concessional lending instruments and financing framework. This update is based on data available at end-August and also takes into account the implications of these reforms.

2 The main points of the paper are:

Reform of LIC facilities and financing

  • On July 23, the Executive Board approved a comprehensive support and reform package to strengthen the Fund’s capacity to help LICs cope with the crisis and achieve durable poverty reduction and growth.

  • Current PRGF-ESF Trust lenders and subsidy contributors are encouraged to give their early consents to these reforms to make them effective expeditiously. It is also urgent that member countries provide additional loan and subsidy contributions to ensure the necessary funding of the reform package. Available loan resources could be fully depleted in 2–3 months in the absence of additional commitments.

Demand projections

  • Loan demand has been stronger than expected, and could reach an average of SDR 2.7 billion a year in 2009–10 (US$8 billion in total), exceeding the US$6 billion over 2–3 years called for by G-20 leaders at the London Summit.

  • Demand over the medium term could amount to about SDR 1.5 billion a year, double the long-term historical average. On this basis, total concessional financing could amount to SDR 11.3 billion (US$17 billion) through 2014–15.

Loan and subsidy resources

  • Reflecting a significant pick-up in demand, available loan resources are nearing depletion, and additional resources are urgently needed Additional loan resources of SDR 9 billion are being sought to cover the projected need through 2014–15.

  • New subsidy resources of SDR 1.5 billion (end-2008 NPV terms) are also being mobilized. These would come from: (i) bilateral contributions through a broad-based fund-raising effort; (ii) temporarily delaying reimbursement of the GRA for administrative expenses of the Poverty Reduction and Growth Trust (PRGT); (iii) using resources from the PRGT Reserve Account while maintaining its annual self-sustained lending capacity at about SDR 0.7 billion beyond 2014–15; and (iv) using resources linked to the envisaged gold sales.

Subsidization of emergency assistance

  • Available subsidy resources are likely sufficient to cover existing ENDA/EPCA credit. Once the LIC facilities reform becomes effective, concessional emergency assistance will be extended to qualifying members under the PRGT.

Financing of debt relief

  • Available resources are projected to be sufficient to cover the cost of debt relief to the remaining HIPCs. There has been, however, no provision for debt relief to the protracted arrears cases of Somalia and Sudan.3 Substantial additional resources will be needed when these countries are ready to embark on the HIPC Initiative.

  • Liberia is making rapid progress toward the HIPC completion point, which is expected to be reached in 2010. To ensure timely provision of full debt relief at the completion point, it is important that those members that have not yet disbursed their pledges do so as soon as possible.

II. Reform of LIC Facilities and Financing Framework

3 On July 23, 2009, the Executive Board adopted a comprehensive support and reform package to strengthen the Fund’s capacity to help LICs overcome the impact of the global financial crisis and meet their poverty reduction and growth objectives over the medium term.4 Key elements of the package include:

  • A new architecture of concessional facilities, tailored to the diverse needs of LICs and better suited to meet the crisis challenges. The Extended Credit Facility (ECF) provides flexible medium-term support; the Standby Credit Facility (SCF) addresses short-term and precautionary needs; and the Rapid Credit Facility (RCF) provides emergency support.

  • Higher concessionality of the Fund’s financial support, provided in the form of exceptional interest relief to all LICs, with zero percent interest on all types of concessional loans through end-December 2011 and subsidization of the rate of charge to zero percent for subsidized EPCA/ENDA through end-January 2012, and a new interest rate structure thereafter to ensure a permanent increase in concessionality.

4 As part of the reform package, the Board also decided to increase the flexibility of the Fund’s concessional financing framework under the renamed PRGT.5 To strengthen the flexibility of the Fund’s concessional financing framework, it was decided that a general loan account and a general subsidy account be established to receive and provide financing for all LIC facilities under the Trust. In addition, special loan and subsidy accounts for each of the new facilities would enable member countries to earmark their contributions for particular purposes, if they wish to do so (Figure 1). To facilitate mobilization of loan resources, the Board also agreed that the overall borrowing limit of the Trust should be raised from SDR 20 billion to SDR 30 billion.

Figure 1.
Figure 1.

Proposed Concessional Financing Framework

Citation: Policy Papers 2009, 071; 10.5089/9781498335423.007.A001

1/ Transfers may be made from the General Subsidy Account for subsidizing ENDA/EPCA credit on an “as needed” basis.

5. On financing, the Board decided to mobilize new resources to boost the Fund’s concessional lending to SDR 11.3 billion (US$17 billion) through 2014–15, including SDR 5.4 billion (US$8 billion) in 2009–10 (Table 1).6 Additional loan resources of SDR 9 billion are being sought from bilateral contributions. Most of the additional subsidies of SDR 1.5 billion (end-2008 NPV terms) required will be financed from the Fund’s internal resources, including transfers from the PRGF-ESF Reserve Account, delaying reimbursement of the GRA for PRGT administrative costs, and use of resources linked to the envisaged gold sales. New bilateral subsidy contributions are also being sought from the membership to complete the financing package.

Table 1.

Demand Projections

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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. The above reforms will become effective when all current lenders and subsidy contributors to the PRGF-ESF Trust provide their consent to the required amendments of the PRGF-ESF Trust Instrument. In early August, the Managing Director wrote to all concerned member countries, requesting their consent to these reforms. Those members that have not yet provided their consent are encouraged to do so as soon as possible. This will allow LICs to benefit from the new architecture of concessional facilities expeditiously.

7. It is also urgent that additional bilateral loan and subsidy resources be mobilized and secured. The Managing Director has approached a wide spectrum of the membership to seek additional resources. To date, several members have provided specific pledges, a number of members have indicated that they are in the process of providing commitments, while others have not yet responded. Several members have also expressed interest in using SDRs as loan resources for LICs, which would provide an important source of financing. Staff are looking into this issue and relevant modalities to facilitate such contributions. It is crucial that specific commitments be forthcoming to ensure the necessary funding of the new LIC concessional facilities.

III. Financing of Concessional Operations

A. Loan Resources

8. In the first eight months of 2009, new PRGF-ESF commitments amounted to SDR 2.1 billion, as compared to SDR 0.8 billion for 2008 as a whole (Figure 2). This includes: (i) SDR 0.8 billion for four countries with new PRGF arrangements; (ii) augmentations totaling SDR 0.3 billion under seven existing PRGF arrangements; and (iii) ESF financing of about SDR 1.0 billion for ten countries (Table 2). Based on country-by-country information provided by area departments, additional commitments could amount to SDR 0.5–0.8 billion through end-2009.

Figure 2.
Figure 2.

PRGF-ESF Commitments to LICs, 1988–2009

Citation: Policy Papers 2009, 071; 10.5089/9781498335423.007.A001

Table 2.

New PRGF-ESF Commitments in 2009

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

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9. In the absence of additional contributions, available loan resources could be fully depleted in the next two to three months, and jeopardize the Fund’s ability to provide timely support to LICs in the current difficult global situation. Uncommitted PRGF-ESF loan resources stood at about SDR 0.5 billion at end-August (Table 3). This includes a new borrowing agreement with Agence Française de Développement (France) in the amount of SDR 670 million, which became effective on August 20. It is, therefore, urgent that additional loan resources be secured expeditiously.

Table 3.

PRGF-ESF Trust—Loan Resources (In billions of SDRs; end-August 2009)

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B. Subsidy Resources

10. Resources needed to fully subsidize the projected new lending could amount to SDR 2.5 billion in end-2008 NPV terms. These estimates take into account projected demand in 2009–10 and over the medium term, and the estimated cost of the temporary interest relief through end-2011.

11. Additional subsidy resources of about SDR 1.5 billion will need to be secured to meet the projected demand through 2014–15. Available subsidy resources are estimated at SDR 1 billion at end-2008.7 These resources include actual balances held in the PRGF-ESF and PRGF-HIPC Trusts, and contributions that have been committed but not yet received, including those committed in the context of the establishment of the ESF. It is, therefore, important that additional bilateral contributions be forthcoming to complete the financing package. It is also important that the remaining pledges made in the context of the previous PRGF and ESF fund-raising efforts be received as soon as possible (Tables 4 and 5).

Table 4.

PRGF-HIPC Trust – Pending Contributions

(In millions of SDRs “as needed”; end-June 2009)

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Remaining balances.

Table 5.

ESF Subsidy Contributions

(In millions of currency units; end-July 2009)

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Calculated using the exchange rates of end-July 2009.

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

C. 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 Trust Fund and Structural Adjustment Facility (SAF) repayments and investment returns on the balances held in the Account. The balances in the Reserve Account stood at SDR 3.9 billion at end-June 2009, representing a substantial multiple of projected PRGF repayments falling due in the coming 12 months and about 86 percent of PRGF-ESF Trust obligations as of end-June 2009 (Appendix Table 4). Upon effectiveness of the LIC facilities reforms the Reserve Account will be renamed the PRGT Reserve Account and provide security for all PRGT lending. Additionally, the equivalent of SDR 0.62 billion (end-2008 NPV terms) will be transferred from the Reserve Account to the General Subsidy Account for the subsidization of the Fund’s assistance to LICs under the PRGT. After these transfers, it is estimated that the Reserve Account will still provide a loan coverage ratio of about 40 percent, in line with the historical average.

13. It has long been envisaged that the Fund’s concessional lending beyond 2014-15 could be subsidized by the resources in the Reserve Account on a “self-sustained basis” when available subsidy resources are depleted. Staff projections indicate that the Reserve Account could subsidize annual lending of about SDR 0.7 billion on a sustained basis starting in 2015, in line with the earlier estimates and consistent with the financing package adopted by the Board on July 23. As discussed in the previous updates, these projections are subject to significant uncertainties and important assumptions regarding the rate of investment return earned on the Reserve Account balance, interest rates paid to lenders, resumption of the reimbursement of the GRA for PRGT administrative expenses, and repayments of overdue Trust Fund, SAF, and PRGF obligations by the protracted arrears cases once their arrears are cleared.

IV. Subsidization of Emergency Assistance

14. The Fund has provided emergency assistance from the GRA (ENDA and EPCA) to help member countries in the wake of natural disasters or as they emerge from conflict. Since 2001, bilateral contributions have allowed the Fund to provide such assistance to PRGF-eligible members at a reduced rate of charge of ½ percent per annum (plus burden-shared adjustments).8

15. There have been several new developments since the last update. In July 2009, Korea made a commitment to provide KRW 1 billion (SDR 0.5 million) for the subsidization of both EPCA and ENDA credit and disbursed the contribution shortly thereafter. On the borrowing side, Guinea-Bissau requested a third purchase under the EPCA of about SDR 1.8 million (12.5 percent of quota). This brings the total number of countries that have benefited from the subsidization of ENDA/EPCA to 17 with 31 requests (Appendix Table 6).

16. The LIC reform package has important implications for the Fund’s emergency assistance to eligible members. When the reform becomes effective, a temporary subsidization of the rate of charge to zero percent will be provided in respect of outstanding ENDA/EPCA credit through end-January 2012. It is expected that seven countries would benefit from such relief; of these, two members have outstanding EPCA credit (Comoros and Guinea-Bissau) and five members have outstanding ENDA credit (Bangladesh, Dominica, Grenada, Maldives, and Sri Lanka). It is estimated that currently available resources will be sufficient to subsidize existing ENDA/EPCA credit, including the temporary interest relief. EPCA/ENDA will remain GRA facilities following the LIC reforms, but the administered account for EPCA/ENDA subsidies will not provide subsidies for EPCA/ENDA credit approved after the effective date of the LIC reforms. Rather, new concessional emergency assistance will be provided to qualifying members under the Rapid Credit Facility and financed by the relevant loan and subsidy resources available in the PRGT.

V. Financing of HIPC and MDRI Debt Relief

17. The Fund has, to date, provided 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 27 countries under the MDRI (Appendix Tables 7 and 8).9 Since the last update, the Central African Republic and Haiti have reached the HIPC completion point. The Central African Republic has also received debt relief under the MDRI.

A. Remaining HIPCs

18. Following the attainment of the HIPC completion point by two countries since the last update, the Fund’s cost of debt relief to the remaining HIPCs is now estimated at SDR 0.4 billion (Table 6).10 In early 2009, Nepal communicated its decision not to avail itself to debt relief under the HIPC Initiative and is therefore excluded from the cost estimates. The estimated cost associated with the remaining countries identified during the ring-fencing exercise is lower by about SDR 7 million due to the removal of Nepal from the cost estimate.11

Table 6.

Financing of Debt Relief to the Remaining HIPCs

(In billions of SDRs; end-June 2009 NPV terms)

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Including resources in the HIPC Umbrella account.

19. Available resources in the HIPC/MDRI accounts, at SDR 0.8 billion as of end-June 2009, are estimated to be sufficient to cover the projected cost.12 Specifically, available resources in the HIPC account are estimated to exceed the projected needs by about SDR 0.1 billion, largely reflecting lower costs for Côte d’Ivoire and Togo. The two MDRI Trusts are estimated to have a surplus of about SDR 0.3 billion, mainly due to delays in reaching the 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.13

20. The estimated cost of debt relief to Liberia is about SDR 550 million. This is slightly higher than the previous estimates, reflecting the assumptions regarding the timing of the completion point and the interest rate path. In total, 102 member countries have pledged contributions. 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 30 million in the PRGF-HIPC Trust. Commitments of SDR 119 million made by the remaining contributors have not yet been received. As Liberia is making rapid progress toward its HIPC completion point, it is important that these contributors make efforts to disburse their commitments as soon as possible (Appendix Table 9).

B. Protracted Arrears Cases

21. Providing debt relief to Somalia and Sudan would require substantial additional resources. As of end-June 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,14 additional financing would need to be identified and secured when these members are ready to clear their arrears and embark on the HIPC Initiative.15 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.

22. 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-June 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-June 2009)

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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, new ESF subsidy contributions, and any contribution made in the context of the LIC reform of 2009.

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.

A borrowing agreement in the amount of SDR 670 million became effective on August 20, 2009. The loan and associated subsidy contribution were pledged in support of the establishment of the ESF.

Appendix Table 2.

PRGF-ESF Trust—Loan Agreements

(In millions of SDRs; as of end-June 2009)

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Including additional loan commitments for interim PRGF operations.

A fourth borrowing agreement with the Agence Française de Développement (AFD) in the amount of SDR 670 million became effective on August 20, 2009.

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-June 2009)

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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-July 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-July 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.

Existing contribution, previously earmarked for ENDA.

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; end-July 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-July 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.