Update on the Financing of the Fund's Concessional Assistance and Debt Relief to Low-Income Member Countries

Significant progress has been made towards meeting the fund-raising targets for the PRGT, but additional resources will be needed to complete the 2009 LIC financing package. So far, fourteen members have pledged about SDR 9.8 billion in new loan resources, compared to the target of SDR 10.8 billion (including provision for a liquidity buffer to facilitate encashment). New borrowing agreements totaling SDR 7.7 billion have been signed with ten lenders. Six of these agreements provide loan resources in SDRs, and five creditors also participated in the voluntary encashment regime.


Significant progress has been made towards meeting the fund-raising targets for the PRGT, but additional resources will be needed to complete the 2009 LIC financing package. So far, fourteen members have pledged about SDR 9.8 billion in new loan resources, compared to the target of SDR 10.8 billion (including provision for a liquidity buffer to facilitate encashment). New borrowing agreements totaling SDR 7.7 billion have been signed with ten lenders. Six of these agreements provide loan resources in SDRs, and five creditors also participated in the voluntary encashment regime.

I. Introduction1

1. This paper reviews the status of financing for the Fund’s concessional lending and debt relief for low-income countries (LICs). 2 It is based on the latest available data and projections, and it takes into account the pledges 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 describes progress in the implementation of the July 2009 reform of the Fund’s concessional lending instruments and the associated financing framework. Section III reviews PRGT operations and discusses developments in the PRGT Reserve Account. Section IV provides updates on the subsidization of emergency assistance, while Section V presents the developments on the financing of debt relief under the HIPC, MDRI, and the Post-Catastrophe Debt Relief (PCDR) Trust.

II. LIC Facilities and Financing Framework

3. Since the effectiveness of the LIC reform, lending commitments to LICs have been approved under all three PRGT facilities—the Extended Credit Facility (ECF), the Standby Credit Facility (SCF), and the Rapid Credit Facility (RCF).3 Loan and subsidy resources have been made available through all loan and subsidy accounts of the PRGT (Figure 1). These resources allow the full operation of the PRGT, and in light of the closure of the ESF Subsidy Account in May 2010 after resources in that account were fully depleted, the resources in the ECF Subsidy Account are available to meet the subsidy needs of the existing ESF loans. The temporary waiver of interest payments on the PRGT lending remains in effect through end-2011.

Figure 1.
Figure 1.

Concessional Financing Framework

Citation: Policy Papers 2011, 001; 10.5089/9781498339063.007.A001

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

4. The LIC financing package approved in July 2009 remains appropriate. The package aims to boost the Fund’s concessional lending capacity to SDR 11.3 billion during the period 2009-14. It is an essential element of the 2009 LIC reforms, and requires the mobilization of new loan resources of SDR 10.8 billion to meet projected demand (including a liquidity buffer to enable a voluntary encashment regime). The financing package also includes new subsidy resources of SDR 1.5 billion (end-2008 NPV terms). Most of the additional subsidies are being 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 200-400 million (end-2008 NPV terms) are also an important element to complete the financing package. The Managing Director approached a wide spectrum of the membership to mobilize the necessary loan and bilateral subsidy resources, and staff has been following up on these requests.

III. Financing of PRGT Operations

A. Projected Financing Needs

5. New PRGT commitments in 2010 amounted to SDR 1.2 billion, down from SDR 2.5 billion in 2009. Commitments in 2010 were lower than previously projected, largely reflecting delays in potential requests from some members with larger quotas. Lower demand also reflected the improved resilience of LICs against an adverse external environment, as a result of the policy buffers built up prior to the global financial crisis. The new PRGT commitments during 2010 (Table 1 and Figure 2) included:

(i) SDR 956.5 million for twelve new ECF arrangements; (ii) augmentations totaling SDR 107.3 million under four existing ECF arrangements; (iii) RCF financing of SDR 50.7 million for two members; and (iv) SDR 77.2 million for two SCF arrangements.

Table 1.

New PRGT Commitments to LICs in 2010

(In millions of SDRs, as of end-December, 2010)

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Blend with EFF.

Blend with SBA.

Figure 2.
Figure 2.

PRGT Commitments to LICs, 1988-2010

Citation: Policy Papers 2011, 001; 10.5089/9781498339063.007.A001

6. Total projected demand for PRGT loans over the period 2009-14 remains broadly consistent with the earlier estimates of SDR 11.3 billion. Information provided by area departments suggests demand could pick up in 2011 to about SDR 2 billion. As the global outlook remains highly uncertain, demand over the medium term is likely to remain elevated, at about SDR 1.5-2.0 billion annually. On this basis, the overall financing capacity needs for 2009-14 would remain at about SDR 11.3 billion, in line with the projections made at the time of the reform of the LIC facilities (Table 2).4

Table 2.

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

7. Steady progress has been made towards meeting the fund-raising targets for the PRGT, but additional resources will be needed to complete the 2009 LIC financing package. Fourteen members have pledged about SDR 9.8 billion in additional loan resources, of which SDR 7.7 billion have so far been secured through borrowing agreements with ten members (Table 3). Since the last update, SDR 500 million has been secured to the General Loan Account (GLA) through a borrowing agreement with the Bank of Korea, and Saudi Arabia has pledged SDR 500 million in loan resources. Of the loan resources secured so far, SDR 3.7 billion are through traditional Loan Agreements, and SDR 3.9 billion through Note Purchase Agreements (NPAs). The bulk of these resources are available to the GLA and the ECF Loan Account—SDR 5.2 billion and SDR 2.1 billion, respectively, while the SCF and RCF Loan Accounts have each received SDR 0.15 billion.

Table 3.

New Commitments of Loan Resources to the PRGT 1/

(In millions of SDRs; as of end-February, 2011)

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Germany (KfW) made a pledge of SDR 1.53 billion. As mutually acceptable lending terms could not be agreed, it is excluded from the total.

8. Some of the new PRGT borrowing agreements have made use of elements of the new framework for mobilizing bilateral loan resources.5 Five members—China, France, Korea, Japan, and the United Kingdom—have included in their borrowing agreements participation in the encashment regime of the PRGT, which will enable their claims to be readily repayable in case of balance of payments need. Four of these borrowing agreements have shorter maturities than under traditional loan agreements. In all these cases, the Fund, at its sole discretion, can extend the maturities for additional periods up to the maturity dates for the corresponding loan disbursements under the facility of the Trust. The borrowing agreements with China, Japan, and the United Kingdom were in the form of NPAs. In total, >six of the new borrowing agreements provide SDR 6.2 billion loan resources in SDRs and all these contributors have voluntary SDR trading arrangements in place. As of end-February 2011, no drawings have been made under these new SDR borrowing arrangements.6

9. Uncommitted PRGT loan resources, including the recently secured resources, stood at about SDR 6.3 billion as of end-February 2011. Specifically, available uncommitted resources of the GLA and the Special Loan Accounts (SLA) for the ECF, RCF, and SCF amounted to SDR 5.2 billion, SDR 1.0 billion, SDR 0.12 billion, and SDR 0.08 billion, respectively. These loan resources will be sufficient to cover projected demand beyond 2012.7

10. It is important that existing pledges of loan resources be finalized and new pledges be made to complete the loan package. New loan contributions are targeted at SDR 10.8 billion, to support the projected concessional lending of SDR 11.3 billion through 2014 and provide a liquidity buffer for loan contributions under the voluntary encashment regime. It is therefore imperative that the remaining pledged resources of SDR 2.2 billion be secured, and that further pledges of about SDR 1 billion be mobilized and secured to complete the package (Table 4).

Table 4.

PRGT Loan Resources Mobilization

(In billions of SDRs; as of end-February, 2011)

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Secured through Loan Agreements with Canada, Denmark, France, Korea, the Netherlands, Norway, and Spain and through Note Purchase Agreements with China, Japan, and the United Kingdom.

C. Subsidy Resources

11. At end-2010, available PRGT subsidy resources amounted to SDR 1.4 billion, excluding contributions received or committed in the context of the current fund-raising effort.8 This amount includes all contributions pledged during the 2005 ESF fund-raising exercise, including SDR 63 million that are expected to be received (Table 5). However, it excludes SDR 32 million pledged during earlier fund-raising that donors have not yet provided (Table 6). On this basis, since it is estimated that about SDR 1.0 billion will be needed to subsidize existing PRGT commitments, SDR 0.4 billion is currently available to subsidize new lending.

Table 5.

ESF Subsidy Contributions

(In millions of currency units; end-February 2011 )

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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.

Table 6.

PRG-HIPC Trust - Pending Contributions

(In millions of SDRs “as needed”; end-February 2011)

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Remaining balances.

12. The financing package approved in July 2009 remains adequate to ensure the availability of resources to subsidize the projected new lending through 2014. As was envisaged, this package would secure additional subsidy resources of SDR 1.5 billion (end-2008 NPV terms), needed to meet demand of SDR 11.3 billion through 2014 and also allow the self-sustained subsidization capacity of PRGT lending by the Reserve Account beyond 2014 at about SDR 0.7 billion on an annual basis.

13. Additional pledges of bilateral subsidy resources are needed to reach the target for bilateral contributions and complete the financing package agreed by the Board in July 2009. Positive progress has been made in securing bilateral subsidy resources. In response to the Managing Director’s request, twenty-three members have agreed to contribute a total of SDR 154.5 million in subsidy resources (Table 7). They include traditional as well as nontraditional donors—several are emerging market countries—and further pledges are needed to reach the bilateral contributions target of SDR 200-400 million.

The limited sale of the Fund’s gold holdings was concluded in December 2010, and resources linked to these sales are expected to be used to boost the PRGT subsidies by a further SDR 0.5-0.6 billion (end-2008 NPV terms), as envisaged in the financing package.

Table 7.

New Subsidy Commitments to the PRGT

(In millions of currency units; as of March 22, 2011)

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Calculated using the exchange rates as of March 22, 2011.

Reflecting net investment income (in end-2008 NPV terms) to be generated from deposit/investment agreements.

D. PRGT Reserve Account

14. The PRGT Reserve Account will continue to provide adequate security to PRGT lenders and note purchasers. 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 Trust can tap these resources temporarily to meet its obligations in the event of a delayed payment by a borrower to any loan account of the Trust. The balance in the Reserve Account stood at SDR 3.97 billion at end-2010, representing a substantial multiple of the projected PRGT loan repayments falling due over the next 12 months and about 78 percent of total PRGT obligations (Appendix Table 4).9 It is expected 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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1/ 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 on a “self-sustained basis” using the resources in the Reserve Account.

Available subsidy resources, as well as subsidy resources to be raised as part of the 2009 financing package, are projected to be fully committed in 2014-15. Staff projections suggest that the Reserve Account could subsidize annual lending of about SDR 0.7 billion in nominal terms on a sustained basis starting in 2015. However, these projections are subject to significant uncertainties, 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 the timing of potential repayment of overdue Trust Fund, SAF, and PRGT obligations by the protracted arrears cases.

16. Staff projections of longer-term demand for the Fund’s concessional lending point to a range of between SDR 1.1-1.9 billion for the period 2015-34 (equivalent to SDR 0.9-1.4 billion in constant 2010 SDR terms).10 While longer-term demand projections are necessarily subject to a high degree of uncertainty, these estimates suggest a reasonable range for potential average annual demand over the longer term, taking into account the likely impact of economic growth, graduation from PRGT eligibility, and blended financing. On the basis of these projections, additional subsidy resources would eventually be needed to ensure that the PRGT has sufficient capacity to meet the expected demand. Thus, the framework for lending on a “self-sustained basis” will need to be revisited at an appropriate time to ensure that the lending capacity remains in line with expected demand.

IV. Subsidization of Emergency Assistance

17. The EPCA/ENDA Administered Subsidy Account is being maintained on an interim basis for the subsidization of EPCA/ENDA credits outstanding on January 7, 2010. The rate of charge on EPCA/ENDA credits is subsidized to zero percent until end-January 2012, and thereafter to an annual rate of 0.25 percent. Once these outstanding EPCA/ENDA credits are fully repaid (expected by April 2013), the EPCA/ENDA Administered Subsidy Account will be terminated. Contributors will be encouraged at that time to transfer any balances in the account to the PRGT General Subsidy Account (GSA) or one of the special subsidy accounts of the PRGT (Appendix Table 5).

Appendix Table 5.

Subsidy Contributions for Emergency Assistance

(In millions; as of end-February 2011 )

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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-February 2011.

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.

18. 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-2010, two PRGT-eligible members had outstanding ENDA credit (Bangladesh and Dominica) amounting to SDR 135 million, and there were no PRGT-eligible members with outstanding EPCA credits. At end-2010, available subsidy resources amounted to about SDR 13.2 million. It is estimated that these resources are likely to be sufficient to subsidize the outstanding credits, including providing the additional interest relief through end-January 2012. However, in the event that subsidy resources in the EPCA/ENDA subsidy account were depleted, the PRGT Instrument would allow subsidization of any remaining EPCA/ENDA credits from the PRGT GSA.

V. Financing of Debt Relief

19. As of end-2010, the Fund has provided SDR 5.2 billion of debt relief to eligible countries. This includes HIPC debt relief of SDR 2.5 billion to 36 countries, MDRI debt relief of SDR 2.3 billion to 30 countries, “beyond-HIPC” debt relief to Liberia, and PCDR debt relief to Haiti (Appendix Tables 6 and 7). Since the last update, two countries (Guinea-Bissau and Togo) reached the HIPC completion point, bringing the total number of completion point countries to 32. The remaining 4 decision point countries have so far received HIPC interim assistance of about SDR 29 million. No debt relief was provided through the PCDR Trust since the last update, and the balance in the PCDR Trust stood at SDR 0.1 billion as at end-2010.

Appendix Table 6.

Implementation of the HIPC Initiative

(Millions of SDRs; end-February 2011)

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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-February 2011 )

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Amount outstanding at the completion point (net of repayments between January 1, 2005 to the completion point date).

Balances available at the time of MDRI debt relief.

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

Liberia received MDRI-type (beyond-HIPC) debt relief at end-June 2010, which was financed from the Liberia Administered Account. Its eligible credit outstanding corresponds to the amount of arrears clearance to the IMF in March 2008.

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

A. Remaining HiPCs

20. The Fund’s cost of debt relief to the remaining HIPCs (excluding the protracted arrears cases) is estimated at SDR 0.06 billion in end-2010 NPV terms, in line with the previous estimate (Table 8).11 This estimate is based on assumptions regarding the timing of HIPC decision and completion points and the future path of interest rates, all of which are subject to uncertainty. Moreover, they do not take into account potential needs for HIPC topping-up assistance.

Table 8.

Financing of Debt Relief to the Remaining HIPCs

(Billions of SDRs; end-2010 NPV terms)

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Since the HIPC sub-account is depleted, resources of SDR 0.05 billion are expected to be drawn from the PRG-HIPC sub-account to meet the estimated cost of the remaining HIPCs.

21. Available resources in the PRG-HIPC and MDRI Trusts are estimated to be sufficient to cover debt relief to the remaining eligible countries (excluding the protracted arrears cases).12 The HIPC sub-account of the PRG-HIPC Trust is depleted. Resources in the PRG-HIPC sub-account are expected to be sufficient to cover the projected HIPC needs of about SDR 0.05 billion. The two MDRI Trusts are estimated to have surpluses totaling about SDR 0.05 billion.

B. Pending Contributions to Liberia’s Debt Relief

22. Following Liberia’s HIPC completion point, there remain a number of countries that have yet to finalize their pledged contributions to the Fund’s debt relief to Liberia.

Since the last update, Austria has delivered its contribution of about SDR 5 million, which was placed in the PRG-HIPC Trust. Pledged contributions totaling SDR 22.8 million (March 2008 NPV terms) from 9 members have yet to be received (Table 9). It is important that these contributions be disbursed as soon as possible to replenish the PRG-HIPC Trust.

Table 9.

Pending Disbursements to Finance Debt Relief to Liberia as of end-February 2011

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

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23. The termination date of the SCA-1/Deferred Charges Administered Account has been postponed to allow time for some members to disburse their pledged contributions to Liberia’s debt relief.13 The account was due to be terminated on March 13, 2011, and, as of end-February 2011, it held balances from two members. Both members requested that the account’s termination date be extended to March 13, 2012, to allow the disbursement of the pledged contributions. Accordingly, on March 11, 2011, the Executive Board approved a decision to delay the termination date of the account.

C. Protracted Arrears Cases

24. Providing debt relief to Somalia and Sudan would require substantial additional resources. As of end-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 costing estimates for the HIPC Initiative,14 additional financing would need to be secured when these members are ready to clear their arrears and embark on the HIPC Initiative and possible beyond-HIPC debt relief.15 The approach developed for Liberia’s debt relief, including the financing modalities, could provide a useful framework for Sudan and Somalia at an appropriate time.

25. Additional resources could potentially also 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’s PRGT-eligibility is restored following the arrears clearance to the PRGT (SDR 87.0 million at end-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 PRG-HIPC Trusts

(In millions of SDRs; as of December 31, 2010)

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Less than SDR 5,000.

These are contributions originally pledged for the PRGF-ESF Trust which are now available for the PRGT. Excludes the G-8 commitment of SDR 100 million in end-2005 NPV terms, new ESF subsidy contributions, and any subsidy 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.

The subsidy contribution by one contributor has been adjusted upward by SDR 32 million to include amounts previously not reported because of earlier concerns about a possible excess contribution. It has been established that no excess contribution was made. As agreed with the contributor, this amount is now included in the reporting.

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 January 31, 2011)

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Including additional loan commitments for interim PRGF operations.

Committed to the General Loan Account of the PRGT.

Committed to the ECF Loan Account of the PRGT.

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.

Committed to the SCF Loan Account and RCF Loan Account of the PRGT in equal proportion.

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 March1994.

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.