Update on the Financing of the Fund's Concessional Assistance and Debt Relief to Low-Income Member Countries
Author: International Monetary Fund
Publication Date:
06 Mar 2010
eISBN:
9781498337465
ISBN:
9781498337465
Language:
English
Keywords:
PP; SDR; SDR equivalent; reserve account; loan resource; SDR amount; PRGT obligation; about SDR; loan package; PRGT operations; PRGT note
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This paper updates the quota data base through 2008 and discusses implications for members’ calculated quota shares. A subsequent staff paper will review key issues related to the realignment of quota shares and present additional illustrative simulations, for discussion by the Committee of the Whole in early July.

Abstract

This paper updates the quota data base through 2008 and discusses implications for members’ calculated quota shares. A subsequent staff paper will review key issues related to the realignment of quota shares and present additional illustrative simulations, for discussion by the Committee of the Whole in early July.

Executive Summary

Comprehensive reforms of the Fund’s concessional lending facilities for LICs and the associated financing framework became effective on January 7, 2010. The new architecture of facilities and the new financing framework are now fully operational.

In March 2010, the Board endorsed measures to facilitate mobilization of loan resources for the PRGT. These include a voluntary encashment regime allowing loans of participating lenders to qualify as reserve assets; the issuance of PRGT notes; and a revised framework for lending in SDRs. Decisions to implement the new framework will be considered shortly; upon approval, consents will be sought from current PRGT lenders.

Demand for PRGT loans through 2014 is expected to remain broadly in line with the earlier projection of SDR 11.3 billion. New concessional loans of SDR 2.5 billion were committed in 2009 and latest projections point to a similar level in 2010, only slightly below the previous projection.

Members have responded positively to the Managing Directors fund-raising request but additional loan resources are urgently needed to ensure funding of the PRGT. Ten members have pledged about SDR 7.6 billion in additional loan resources, compared to the target of SDR 10.8 billion (including provision for a liquidity buffer to facilitate encashment). If new loan or note purchase agreements are not finalized quickly, available uncommitted loan resources could soon be depleted.

The package approved by the Executive Board in July 2009 for securing needed subsidies remains adequate to finance the potential PRGT demand through 2014.

Seventeen members have committed additional subsidies totaling SDR 113 million, compared to the target of SDR 0.2–0.4 billion. It is important that additional bilateral subsidy contributions are forthcoming to complete this financing package. Remaining pledges made in the previous PRGF and ESF fund-raising rounds should also be disbursed as soon as possible.

Available subsidy resources for EPCA/ENDA are likely to be sufficient to subsidize the remaining EPCA/ENDA credit, including for the temporary interest relief.

Available resources in the HIPC/MDRI accounts are projected to be sufficient to cover debt relief to the remaining HIPCs and MDRI cases. A surplus of SDR 260–290 million is projected in the MDRI-I Trust. However, substantial additional HIPC resources will be needed when Somalia and Sudan 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. Those members that have not yet disbursed their pledges should do so as soon as possible.

I. Introduction

1. This paper reviews the status of financing for the Fund’s concessional lending and debt relief activities for low-income countries (LICs).1 It is based on the latest available data and projections, and it takes into account the commitments made so far in response to the Managing Director’s fund-raising request of August 2009.

2. The paper is organized as follows. Section II summarizes: (i) the comprehensive reforms of the Fund’s concessional lending instruments and the associated financing framework that have become effective since the last review; and (ii) the measures that the Board recently endorsed to facilitate the needed mobilization of loan resources. Section III on the financing of PRGT operations begins by reviewing the projected financing needs established in July 2009 in light of recent commitments under the PRGT, and then considers the status of loan and subsidy resources, before discussing developments in the PRGT Reserve Account. Sections IV and V provide updates on the subsidization of emergency assistance and the financing of debt relief under the HIPC and MDRI.

II. Reform of LIC Facilities and Financing Framework

3. In July 2009, the Executive Board approved far-reaching reforms of the Fund’s concessional lending facilities for low-income countries (LICs). These reforms created a new architecture of facilities that is more flexible and tailored to the increasing diversity of LICs and their needs.2 As part of the reform package, the Board also approved a new concessional financing framework, and the PRGF-ESF Trust was renamed the Poverty Reduction and Growth Trust (PRGT). These reforms became effective on January 7, 2010, when all current lenders and subsidy contributors to the Trust provided their consent to the relevant amendments of the PRGT Instrument. Key elements of the reform package include:

  • A new architecture of concessional facilities, with three distinct facilities—the Extended Credit Facility (ECF) to provide flexible medium-term support; the Standby Credit Facility (SCF) for addressing short-term and precautionary needs; and the Rapid Credit Facility (RCF) to provide emergency support.

  • Higher concessionality of the Fund’s financial support, provided in the form of exceptional interest relief to all LICs—zero percent interest on all 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 thereafter a new interest rate structure to ensure a permanent increase in concessionality.

  • Increased flexibility of the Fund’s concessional financing framework under the PRGT. To this end, a general loan account and a general subsidy account were 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).

Figure 1.
Figure 1.

Current Concessional Financing Framework

Citation: Policy Papers 2010, 013; 10.5089/9781498337465.007.A001

4. Following the effectiveness of the reform, the new PRGT financing framework was put in place. The Trust now has four loan accounts and five subsidy accounts (see Figure 1). Existing loan agreements on January 7, 2010 were transferred to the ECF Loan Account. Similarly, subsidy resources in the PRGF or PRGF-ESF Subsidy Accounts were transferred to the ECF Subsidy Account, unless contributors requested that their resources be transferred to the new General Subsidy Account (GSA) or the Special Subsidy Accounts. In addition, some contributors requested the balances of their contribution in the ESF Subsidy Account be transferred to the GSA and the Special Subsidy Accounts (Table 1).

Table 1.

Transfer of Bilateral Contributions to the PRGT Subsidy Accounts

(In millions of SDRs; as of January 8, 2010)

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In addition, the IMF’s SDA resources of SDR 644 million in the PRGF-ESF Subsidy Account were transferred to the ECF Subsidy Account upon the effectiveness of the reform.

5. In March 2010, the Board endorsed a number of measures to facilitate mobilization of additional loan resources for the PRGT, including the greater use of SDRs. Most Directors supported proposals to allow the issuance of PRGT notes, and to create a voluntary encashment regime allowing lending of participating creditors to qualify as reserve assets. The Board will consider shortly decisions to implement these measures to facilitate the mobilization of PRGT loan resources, after which lenders’ consents will be sought.

6. A financing package to boost the Fund’s concessional lending to SDR 11.3 billion through 2014 was also approved at the time of the reforms to LIC facilities. This package envisaged new loan contributions of SDR 9 billion to meet projected demand. Following the Board’s endorsement of the creation of a voluntary encashment regime that would require a liquidity buffer of 20 percent, the target for the mobilization of loan resources has been raised to SDR 10.8 billion. The financing package included new subsidy resources of SDR 1.5 billion (end-2008 NPV terms). Most of the additional subsidies are to be financed from the Fund’s internal resources—including transfers from the PRGT Reserve Account, delaying reimbursement of the GRA for PRGT administrative costs, and use of resources linked to gold sales. New bilateral subsidy contributions of SDR 0.2–billion (end-2008 NPV terms) are also required to complete the financing package. The Managing Director has approached a wide spectrum of the membership to mobilize the necessary loan and subsidy resources.

III. Financing of PRGT Operations

A. Projected Financing Needs

7. The demand for the Fund’s concessional financing has so far has been broadly in line with staff projections at the time of the July 2009 discussion of LIC reforms, which indicated that demand could reach SDR 11.3 billion through 2014. In 2009, new PRGT commitments of SDR 2.5 billion were sharply higher than in 2008 and broadly in line with the projection of SDR 2.7 billion (Figure 2). New commitments included: (i) SDR 1.2 billion for six countries with new ECF arrangements; (ii) augmentations totaling SDR 0.3 billion under eight existing ECF arrangements; and (iii) ESF financing of about SDR 1.0 billion for twelve countries (Table 2). In the first three months of 2010, new PRGT commitments amounted to SDR 0.4 billion, including three new ECF arrangements, and two ECF augmentations.

Figure 2.
Figure 2.

PRGT Commitments to LICs, 1988–2009

Citation: Policy Papers 2010, 013; 10.5089/9781498337465.007.A001

Table 2.

New PRGT Commitments to LICs in 2009

(In millions of SDRs)

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8. The global economy is regaining some growth momentum, but considerable uncertainties persist and staff currently sees no strong basis to revise the previous projections for total concessional financing. The latest country-by-country information provided by area departments suggests that commitments in 2010 could amount to SDR 2.5 billion, only slightly below the previous projection.3 Demand over the following 4 years could also amount to about SDR 1.5–1.7 billion a year, double the long-term historical average of SDR 0.7 billion. In the event that demand through 2014 were to fall short of these projections, the financing package, including the envisaged subsidy resources, would support concessional lending beyond 2014 and allow a delayed start of the Reserve Account subsidization with a higher self-sustaining capacity than the current estimate of annual commitments of SDR 0.7 billion.

Table 3.

Projections of Concessional Lending to LICs through 2014

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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.

B. Loan Resources

9. Members have responded positively to the Managing Director’s fund-raising request. Ten members have pledged about SDR 7.6 billion in additional loan resources, of which SDR 1.1 billion has been secured (Table 4).4 Members committing the bulk of the loan resources have indicated that they wish to provide the resources by lending SDRs.

Table 4.

New Loan Commitments to the PRGT

(In millions of SDRs; end-March 2010)

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Calculated using the exchange rates as of end- March 2010.

10. However, it is urgent that existing pledges be finalized and new pledges made to complete the loan package, as uncommitted loan resources could soon be depleted. Uncommitted PRGT loan resources, including the uncommitted balances of the recently agreed borrowing agreements with the Bank of Spain, Danmarks Nationalbank, and the Government of Canada, stood at about SDR 0.8 billion at end-March 2010. All of these uncommitted loan resources are available in the GLA. Following the Board’s endorsement in March 2010 of a new framework for loan mobilization, loan resources totaling SDR 10.8 billion are being targeted to support the projected concessional lending of SDR 11.3 billion over the medium term. Considering that only SDR 1.1 billion of new loan resources have so far been secured, there is an urgent need to finalize borrowing agreements for the remaining pledged resources of SDR 6.5 billion, and to mobilize new pledges of SDR 3.2 billion (Table 5).

Table 5.

PRGT Loan Resources Mobilization

(In billions of SDRs; end-March 2010)

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Secured from Canada, Denmark, and Spain.

C. Subsidy Resources

11. Members have also responded positively to the Managing Director’ request for subsidy resources. So far 17 members have agreed to contribute a total of SDR 113 million in subsidy resources (Table 6). It is important that the targeted additional bilateral subsidy resources be mobilized and secured, to ensure that the Fund remains in a position to meet the needs of LICs.

Table 6.

New Subsidy Commitments to the PRGT

(In millions of currency units; end-March 2010)

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Calculated using the exchange rates as of end-March 2010.

Reflecting net investment income (in end-2008 NPV terms) to be generated from deposit agreements, which are already in effect.

12. At end-January 2010, available subsidy resources amounted to SDR 1.4 billion, excluding contributions committed in the context of the current fund-raising effort. 5 This amount includes bilateral contributions of SDR 0.16 billion committed during the previous fund-raising exercises but not yet received. It also includes subsidy resources of SDR 0.1 billion of previously earmarked contributions received in the context of previous fund-raising rounds, which were made available at end-2009 for the subsidization of lending to all LICs.6 It is estimated that SDR 0.9 billion will be needed to subsidize existing PRGT commitments, and therefore SDR 0.5 billion is currently available to subsidize new lending.

13. These estimates suggest that the financing package approved in July 2009 remains adequate to ensure the availability of resources to subsidize the projected new lending through 2014. This package would secure additional subsidy resources of SDR 1.5 billion (end-2008 NPV terms), and also allow the capacity of the projected self- sustained PRGT to remain at SDR 0.7 billion as envisaged previously. It is important that additional bilateral contributions be forthcoming to complete the approved financing package in support of the Fund’s concessional lending to LICs. The remaining pledges made in the context of the previous PRGF and ESF fund-raising rounds should also be disbursed as soon as possible (Tables 7 and 8).

Table 7.

PRG-HIPC Trust - Pending Contributions

(In millions of SDRs “as needed”; end-March 2010)

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Remaining balances.

Table 8.

ESF Subsidy Contributions

(In millions of currency units; end-March 2010)

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Calculated using the exchange rates as of end-March 2010.

To be generated from the concessional loan as an implicit subsidy.

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

D. PRGT Reserve Account

14. The PRGT Reserve Account provides security to bilateral lenders in the event of a delay or nonrepayment by borrowers under all loan facilities of the Trust. 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 balance in the Reserve Account stood at SDR 3.9 billion at end-2009, representing a substantial multiple of projected concessional loan repayments falling due in the next 12 months and about 79 percent of PRGT obligations (Appendix Table 4).7 It is estimated that the Reserve Account will continue to provide a loan coverage ratio of about 40 percent in the medium term, in line with the historical average.

Appendix Table 4.

PRGT—Reserve Account Coverage

(Millions of SDRs; end-period)

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

15. It is envisaged that the Fund’s concessional lending beyond 2014 could be subsidized by the resources in the Reserve Account on a “self-sustained basis” when the 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, 2009. As discussed in the previous updates, these projections are subject to significant uncertainties and important assumptions including: PRGT demand through 2014; the rate of investment return on the Reserve Account balance; interest rates paid to lenders; the resumption of the reimbursement of the GRA for PRGT administrative expenses; and repayments of overdue Trust Fund, SAF, and PRGT obligations by the protracted arrears cases once their arrears are cleared. In the event that PRGT demand through 2014 were to fall short of these projections, this would enable the financing package to support a higher self-sustaining capacity for the PRGT than the current estimate of SDR 0.7 billion annually.

IV. Subsidization of Emergency Assistance

16. The recent reform of LIC facilities has far-reaching implications for the Fund’s emergency assistance and subsidization for eligible members. The Fund has provided emergency assistance (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 PRGT-eligible members at a reduced rate of charge of percent per annum (plus burden-shared adjustments).8 Subsidization of the rate of charge to zero percent for the ENDA/EPCA credits currently outstanding to PRGT-eligible members will be provided through end-January 2012. After that date, the rate of charge payable to the Fund by these members on their remaining outstanding credits will be subsidized down to an annual rate of 0.25 percent. In line with the LIC reforms, the administered account for ENDA/EPCA subsidies no longer provide subsidies for new ENDA/EPCA credits incurred after January 7, 2010.

17. It is estimated that currently available subsidy resources in the EPCA/ENDA Administered Subsidy Account will be sufficient to subsidize the remaining EPCA/ENDA credits. As of end-January 2010, available subsidy resources amounted to close to SDR 15 million. On January 7, 2010, five PRGT-eligible members had outstanding EPCA/ENDA credit amounting to SDR 154.1 million; one member had outstanding EPCA credit (Guinea-Bissau) and four members had outstanding ENDA credit (Bangladesh, Dominica, Maldives, and Sri Lanka).9 Also taking into account the additional interest relief to be provided through end-January 2012, it is estimated that available subsidy resources are likely to be sufficient for these credits. However, in case the subsidy resources in the EPCA/ENDA subsidy account are depleted, the recent amendments of the PRGT Instrument allow that subsidization of the remaining EPCA/ENDA credit would be provided from the PRGT GSA.

18. The EPCA/ENDA Administered Subsidy Account will be maintained on a temporary basis for subsidizing EPCA/ENDA credit outstanding as of January 7, 2010. Once these outstanding EPCA/ENDA credits are fully repaid (expected by April 2013), the EPCA/ENDA Administered Subsidy Account will be terminated. At that time contributors would be encouraged to transfer any balances in the account to the PRGT GSA or other special subsidy accounts of the PRGT (Appendix Table 5).

Appendix Table 5.

Subsidy Contributions for Emergency Assistance

(In millions; as of end-March 2010)

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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 2010.

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.

V. Financing of HIPC and MDRI Debt Relief

19. To date, the Fund has provided SDR 4.7 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 28 countries under the MDRI (Appendix Tables 6 and 7).10 A total of 28 countries have so far reached the completion point. Another seven countries have reached the decision point under the enhanced HIPC Initiative and received SDR 0.1 billion of HIPC Initiative interim assistance.

Appendix Table 6.

Implementation of the HIPC Initiative

(Millions of SDRs; end-March 2010)

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

At the time of its decision point, Afghanistan did not have any outstanding eligible debt.

Includes commitment under the original HIPC Initiative.

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

Appendix Table 7.

Debt Relief Following Implementation of the MDRI

(Millions of SDRs; end-March 2010)

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Afghanistan and Haiti did not have MDRI-eligible credit and did not receive MDRI debt relief.

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.

A. Remaining HIPCs

20. 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 0.3 billion in end-2009 NPV terms (Table 9).11 Two countries (Afghanistan and Republic of Congo) reached their completion points since the last update, and four countries (Republic of Congo, Democratic Republic of Congo, Cote d’Ivoire and Togo) received additional interim HIPC assistance of SDR 51.6 million.

Table 9.

Financing of Debt Relief to the Remaining HIPCs

(In millions of SDRs; end-2009 NPV terms)

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Including resources in the HIPC Umbrella account

21. Available resources in the HIPC/MDRI accounts, at SDR 0.8 billion as of end-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 than expected commitments of HIPC assistance for several countries and the decision by some members not to avail themselves of HIPC debt relief. 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 The two MDRI Trusts are estimated to have a surplus of about SDR 0.3 billion, mainly due to delay in reaching the completion point by the Democratic Republic of the Congo. Current projections suggest that the MDRI-I Trust will have a surplus of SDR 260–290 million, and a firmer estimate will be known in mid-year when the Democratic Republic of the Congo is expected to reach the completion point.

22. Resources committed by members for Liberia’s debt relief are broadly sufficient for it to reach the completion point. The estimated cost of debt relief to Liberia is about SDR 550 million (March 2008 NPV terms).14 This compares to pledged contributions from 102 members of SDR 547 million (Appendix Table 8). To date, 79 contributors have transferred SDR 438 million of their contributions to the Liberia Administered Account, while 12 others have placed their contributions of SDR 30 million in the PRG-HIPC Trust. Contributions made by the remaining 14 contributors totaling SDR 80 million have yet to be received. As Liberia is making rapid progress toward its HIPC completion point, it is important that these contributors disburse their commitments as soon as possible.15

Appendix Table 8.

Commitments to Finance the Cost of IMF—s Debt Relief to Liberia

(In millions of SDRs; in March 14, 2008 NPV terms)

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Amounts less than SDR 50,000.

Including interest earned in the Liberia Interim Administered Account from the early contributions made by several contributors prior to March 14, 2008.

B. Protracted Arrears Cases

23. Providing debt relief to Somalia and Sudan would require substantial additional resources. As of end-March 2010, 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,16 additional financing would need to be identified and secured when these members are ready to clear their arrears and embark on the HIPC Initiative.17 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.

24. Additional resources could also potentially be needed to provide debt relief to Zimbabwe, if it were assessed to be eligible. Zimbabwe is neither PRGT-eligible nor is it included in the list of “ring-fenced” countries that could benefit from the HIPC Initiative. However, when Zimbabwe is ready to clear its arrears to the PRGT (SDR 89.3 million at end-March 2010), an assessment of Zimbabwe’s eligibility for the HIPC Initiative would need to be made based on the relevant criteria, including whether the NPV of its debt at end- 2004 exceeded the HIPC thresholds. Additional resources may be needed to cover any such HIPC and “beyond-HIPC” debt relief for Zimbabwe.

Appendix Table 1.

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

(In millions of SDRs; as of January 7, 2010)

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Less than SDR 5,000.

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. Reflects the retention in the T rust of overpayments of past subsidy contributions made by two contributors in the context of the establishment of the ESAF.

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.

Including new borrowing agreement in support of 2009 reform of LIC facilities.

Including a borrowing agreement in support of the establishment of the ESF.

Appendix Table 2.

PRGT—Borrowing Agreements

(In millions of SDRs; as of end-March 2010)

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Including additional loan commitments for interim PRGF operations.

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

The loan commitment, which became effective on August 20, 2009, was made in the context of establishment of the ESF.

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.