Update on the Financing of the Fund's Concessional Assistance and Debt Relief to Low-Income Member Countries
Author: International Monetary Fund
Publication Date:
04 Mar 2015
eISBN:
9781498344807
ISBN:
9781498344807
Language:
English
Keywords:
PP; reserve account; national bank; effective date; SDR equivalent; PRGT borrower; PRGT operation; PRGT resource; PRGT loan
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This paper reviews recent developments in the financing of the Fund’s concessional lending and debt relief since the October 2014 Update. It presents the latest available data including the new commitments of loan resources to the PRGT and the sources of initial financing for the newly created CCR Trust, replacing the PCDR Trust. It also discusses the PRGT’s potential self sustaining capacity in the context of longer term projections of the demand for concessional lending and robustness to alternative scenarios.

Abstract

This paper reviews recent developments in the financing of the Fund’s concessional lending and debt relief since the October 2014 Update. It presents the latest available data including the new commitments of loan resources to the PRGT and the sources of initial financing for the newly created CCR Trust, replacing the PCDR Trust. It also discusses the PRGT’s potential self sustaining capacity in the context of longer term projections of the demand for concessional lending and robustness to alternative scenarios.

Introduction1

1. This paper reviews recent developments in the financing of the Fund’s concessional lending and debt relief since the October 2014 Update.2 It presents the latest available data including the new commitments of loan resources to the PRGT and the sources of initial financing for the newly created CCR Trust, replacing the PCDR Trust. It also discusses the PRGT’s potential self-sustaining capacity in the context of longer-term projections of the demand for concessional lending and robustness to alternative scenarios.

2. The paper is organized as follows. Section II provides an overview of the Fund’s concessional lending instruments and the associated financing framework, as well as developments since the last review. Section III reviews the use of PRGT resources and current demand projections. Section IV reviews the sources of financing for PRGT operations, discusses developments related to the PRGT framework, and lists pending contributions to the PRGT. Section V discusses the PRGT’s self-sustaining strategy and the potential implications of alternative scenarios regarding the demand for concessional resources, SDR interest rates, and investment returns. Section VI describes the transformation of the PCDR Trust into the CCR Trust, discusses the liquidation of the MDRI Trusts, and presents developments on the financing of debt relief under the HIPC initiative.

Concessional Financing and PRGT

Summary

  • The two amendments to the PRGT Instrument to allow for the use of the Reserve Account’s investment income for PRGT subsidy operations and for PRGT commitments covering the period 2016–20, became effective on November 11, 2014.

  • The Executive Board, on December 10, 2014, approved a further two-year extension of the temporary interest waiver on PRGT loans, to end-2016.

  • A comprehensive review of PRGT-eligibility is underway.

3. Fund facilities and the associated framework for concessional financing of LICs have been reviewed regularly to take account of the changing needs of these countries. Since the 2010 overhaul of the Fund’s concessional architecture, lending by the PRGT has been conducted under three facilities: the Extended Credit Facility (ECF), the Standby Credit Facility (SCF), and the Rapid Credit Facility (RCF). The establishment of a general loan account and a general subsidy account, alongside facility-specific accounts, strengthened the flexibility of the Fund’s concessional financing framework under the PRGT (Box 1). In September 2012, the Executive Board also approved a strategy to make the PRGT self-sustaining in the longer term,3 and additional amendments were adopted in April 2013 as part of the LIC facilities review.4

PRGT Concessional Financing Framework

The operations of the PRGT are conducted through four Loan Accounts, four Subsidy Accounts, and the Reserve Account. The balances accumulated in these accounts ensure the PRGT’s ability to provide concessional assistance, its lending capacity, and financial strength.

Loan Accounts contain resources borrowed at market interest rates from official creditors and on-lent on a pass-through basis to PRGT-eligible countries. There are loan accounts dedicated to finance each PRGT facility (Rapid Credit Facility (RCF), Stand-by Credit Facility (SCF), and Extended Credit Facility (ECF) loan account, respectively), in addition to the General Loan Account (GLA), which may finance any of the facilities.

Subsidy Accounts (SAs) contain bilateral contributions from members and from the Fund’s own resources. The PRGT extends loans to eligible members at below-market interest rates but it acquires its loan resources and pays back to its lenders a market interest rate. The difference between these borrowing and lending rates is covered from resources held by the SAs. There are subsidy accounts dedicated to subsidize interest payments for each PRGT facility (RCF, SCF, and ECF, respectively), in addition to the General Subsidy Account (GSA), which may subsidize any of the facilities. The dedicated subsidy accounts were established to allow the PRGT creditors and donors to earmark their contributions for use by specific facilities.

The Reserve Account (RA) contains resources that would be called upon to meet the PRGT’s obligations vis-à-vis its creditors in the event of delayed payments by the PRGT borrowers. The account may also be used to meet the Fund’s cost of administering PRGT operations. Under the self-sustained PRGT, investment income from the RA will eventually be used to subsidize concessional lending. The RA was originally financed by reflows of Trust Fund and Structural Adjustment Facility (SAF) repayments, as well as investment returns on balances held in it.

4. In April 2013, the Executive Board conducted a review of the PRGT-eligibility framework and the associated list of eligible countries.5 The review introduced entry and graduation criteria for microstates, and made refinements to the market access criterion, including a differentiation between entry and graduation thresholds. The review also concluded that the criterion on the absence of serious short-term vulnerabilities remained appropriate. Based on the modified framework, two countries (Armenia and Georgia) graduated from PRGT eligibility and three microstates (Tuvalu, Marshall Islands, and Micronesia) were added to the list of PRGT-eligible countries. The PRGT framework and eligibility list are expected to be reviewed every two years, with the next review expected to be concluded in June 2015. The review is guided by a transparent, rules-based framework. The review’s recommendations, including on the entry and graduation of members, are expected to maintain consistency with the self-sustained capacity of the PRGT.

5. In April 2014, the Executive Board approved additional measures to implement the self-sustained PRGT and extend the commitment period for PRGT lending.6 These included amendments to the PRGT Instrument to authorize: (i) the use of the Reserve Account investment income for PRGT subsidy operations, and (ii) new loan commitments to the PRGT covering the period 2016–20. These measures became effective on November 11, 2014, when all current lenders to the PRGT had provided their consent. Also in April 2014, the Board approved an increase in the borrowing limit for the PRGT by SDR 11.0 billion (for a total limit of SDR 37.0 billion).

6. In December 2014, the Executive Board approved a further two-year extension of the temporary interest waiver on PRGT loans, through end-2016. This allows the Fund to continue zero-interest support for LICs at a time when these members still face economic headwinds from the global economic environment. In view of the modest additional cost to the PRGT, the extension of the temporary waiver was considered to be consistent with the three-pillar strategy of the self-sustaining PRGT. Directors noted, however, that it remains important for the integrity of the agreed financing framework that the interest rate mechanism be allowed to function as was originally envisaged, once the current exceptional circumstances subside, so as to safeguard the self-sustaining capacity of the PRGT.7 The next review of the interest rate mechanism of the PRGT is expected to be considered by the Executive Board before end-December 2016.

Demand for PRGT Concessional Lending

Summary

  • Demand for the Fund’s concessional resources in 2014 picked up from 2013 and is projected to rebound significantly in 2015.

  • Total PRGT commitments in 2014 amounted to SDR 0.77 billion, including: i) SDR 459.2 million for three new ECF arrangements; ii) SDR 51.8 million for one new SCF arrangement; iii) SDR 71.3 million for five new RCF disbursements; and iv) SDR 188.3 million for three ECF augmentations.

  • New PRGT commitments in 2015 could be as high as SDR 1.8 billion, depending on the timing of some large financial arrangements currently being considered.

7. Demand for PRGT resources in 2014, while below historical averages, picked up from 2013 and is projected to rebound significantly during 2015. Loan commitments under new PRGT arrangements in 2014 increased to about SDR 0.77 billion (Table 1), from SDR 0.15 billion in 2013, but remained well below the 20-year pre-global crisis average of SDR 0.9 billion, and the commitments of SDR 1.2 billion in 2011 and SDR 1.5 billion in 2012 (Figure 1). Disbursements in 2014 amounted to about SDR 0.55 billion, compared with SDR 0.80 billion in 2013 (Figure 2). PRGT demand could be as high as SDR 1.8 billion in 2015, depending on the timing of some large financial arrangements currently being considered. While this level of commitments would be above the PRGT’s average annual self-sustaining capacity (see below), such year-to-year volatility was envisaged and allowed for under the three-pillar strategy. As noted in Box 2, over the last two decades demand peaked substantially above long-term averages four times, reflecting structural breaks and severe downturns in the global economy. This suggests that actual demand and lending capacity will have to be monitored carefully.

Table 1.

New PRGT Commitments in 2014–15

(In millions of SDRs; as of end-March 2015)

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Consistent with PRGT blending rules (SM/13/75), the SCF arrangements for Honduras and Kenya are blended with SBAs for SDR 77.7 million and SDR 352.82 million, respectively. The authorities of the two countries have indicated that they plan to treat both arrangements as precautionary.

Figure 1.
Figure 1.

New PRGT Commitments, 1988–2014

(In millions of SDRs)

Citation: Policy Papers 2015, 012; 10.5089/9781498344807.007.A001

Figure 2.
Figure 2.

Annual Disbursements to PRGT-Eligible Countries, 1988–2014 1/

(In millions of SDRs)

Citation: Policy Papers 2015, 012; 10.5089/9781498344807.007.A001

1/In April 2010, Albania, Angola, Azerbaijan, India, Pakistan, and Sri Lanka graduated from the PRGT; Armenia graduated in July 2013; Georgia graduated in April 2014.

The Evolution of Fund Concessional Lending to LICs

The amount of concessional lending committed by the Fund to eligible LICs and the number of arrangements and drawings have fluctuated widely over time, with peaks in lending during major structural shifts and global economic crises.

  • In the first half of the 1990s, the number of new concessional lending arrangements and total amount of lending committed under these arrangements increased sharply when the Fund supported members to transition from centrally planned to market economies in Central and Eastern Europe and the Former Soviet Union. In 1994, the Executive Board approved 12 new arrangements, committing a total of SDR 2.2 billion, compared with average of five arrangements in the preceding six years, with average annual amount of SDR 0.55 billion.

  • Demand for Fund financial support peaked again in 1996, when many LICs confronted the consequences of large and unsustainable levels of external debt, low growth, and widespread poverty. In response, the Fund and the World Bank launched the Heavily Indebted Poor Countries (HIPC) initiative aimed at alleviating the debt burden of LICs, and successful implementation of a Fund-supported program was required to access HIPC relief. 14 new arrangements were approved in that year, with a total of SDR 1.3 billion in commitments.

  • A new peak occurred in 2001, when the Executive Board approved 13 new concessional arrangements with a total of SDR 2.1 billion, in response to the economic downturn in the global economy.

  • After some relative calm, Fund lending increased again significantly during 2008–10, at the height of surging food and fuel prices that hit LICs particularly hard along with the impact of global financial crisis. In 2009, 18 new arrangements, with a total of SDR 2.5 billion, were approved.

Looking forward, the global outlook remains highly uncertain and demand may increase sharply from time to time, requiring careful monitoring relative to the PRGT’s self-sustained capacity. While most LICs have recorded strong economic growth over the last decade, they remain vulnerable to downside risks stemming from the fragile global recovery. Although many of them have shown economic dynamism and resiliency to shocks lately, their limited export diversification and small policy buffers leaves them less well-positioned to handle adverse shocks than prior to the global financial crisis. Recent Fund staff analysis concluded that about one-half of LICs are classified as being at medium/high vulnerability to a growth shock, and a protracted period of slower growth in advanced and emerging market economies would have a significant adverse impact on the Fund’s poorest members. LIC frontier market economies face new risks stemming from opening up of access to financial markets, and a number of small-economy PRGT-eligible members are in a particularly vulnerable macroeconomic situation.1/

1/ See Macroeconomic Developments in Low-Income Developing Countries: 2014 Report (09/19/14).

8. Updated staff projections indicate that average long-term demand for the Fund’s concessional lending could be in the range of about SDR 1.2–1.9 billion annually through 2037 (Table 2). Projections for the first decade are similar to those presented in the October 2014 Update, but are somewhat higher for the outer years, subject to greater uncertainty. Projected demand also reflects expectations about the graduation of members with relatively high per-capita income and/or access to international capital markets consistent with the 2013 PRGT-eligibility review. This level of demand compares to the PRGT’s average annual capacity to support concessional lending of about SDR 1¼ billion.

Table 2.

Projected Demand for PRGT Resources Under Alternative Scenarios 1/

(In billions of SDRs)

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The low-case scenario assumes that about 30 percent of PRGT-eligible countries would resort to Fund financing in any given year, while the high-case scenario assumes that some 50 percent of LICs request some form of Fund financial support in any given year.

Based on 50 percent reduction in access norms and limits (in percent of quota) when the quota increase under the Fourteenth General Review of Quotas goes into effect (assumed to occur in 2016), followed by increases in access in nominal SDR terms of 24.2 percent at three-year intervals, starting in 2016. The baseline also incorporates other methodological issues such as (i) applying the vulnerability criterion to the graduation and blending assumptions; and (ii) aligning the graduation assumptions with the two-year PRGT-eligibility review cycle.

For PRGT-eligible countries that are presumed to blend, it is assumed that half of access to Fund resources is from the PRGT.

Sources Of Financing For The PRGT

Summary

  • In response to the Managing Director’s request, of the fourteen lenders that have undrawn loan agreements with the Fund, as of end-March 2015, eleven members had agreed to extend the drawdown periods under current PRGT borrowing agreements from end-2018 until end-2024.

  • Existing loan resources are adequate to cover current demand for PRGT resources at least through end-2016, but new loan agreements will be needed to cover expected commitments through 2020.

  • Staff will shortly approach current and new prospective lenders to the PRGT to solicit additional PRGT loan resources.

  • A number of countries have yet to finalize various subsidy pledges to the PRGT.

A. Loan Resources

9. Since the new Fund concessional architecture became effective in January 2010, new loan resources of SDR 9.8 billion by fourteen members have been provided to the PRGT (Table 3 and Appendix Table 1). No new loan pledges or contributions have been made since the October 2014 Update. Nearly two-thirds of the secured resources (SDR 6.2 billion) have been made available to the General Loan Account (GLA), about one-third (SDR 3.3 billion) to the ECF Loan Account, and the remainder (SDR 0.3 billion) to the SCF and RCF Loan Accounts.

Table 3.

New Commitments of Loan Resources to the PRGT 1/

(In millions of SDRs; as of end-March 2015)

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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.

Appendix Table 1.

PRGT—Borrowing Agreements

(In millions of SDRs; as of end-March 2015)

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1/

Including additional loan commitments for interim PRGF operations.

2/

Committed to the General Loan Account of the PRGT.

3/

Committed to the ECF Loan Account of the PRGT.

4/

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

5/

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

6/

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

7/

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.

8/

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

9/

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

10/

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.

11/

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

12/

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

13/

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.

10. Lenders to the PRGT have made use of all of the elements under the framework for mobilizing bilateral loan resources agreed in 2010. Loan resources have been provided through traditional Loan Agreements and Note Purchase Agreements (NPAs), and seven members participate in the encashment regime of the PRGT.8 Five borrowing agreements also have shorter initial maturities than traditional loan agreements.9 Eight borrowing agreements provide loans to the PRGT in SDRs; all these contributors also have in place voluntary SDR trading arrangements.10 From the start of the sales of SDRs under these arrangements in June 2011 through end-December 2014, drawings amounting to SDR 2.2 billion have been made under the new SDR borrowing agreements. Sales of SDRs related to these drawings amounted to SDR 1.1 billion.11

11. Uncommitted PRGT loan resources amounted to SDR 6.2 billion at end-December 2014. The bulk of these uncommitted loan resources were in the GLA, amounting to SDR 6.1 billion. Resources available in the Special Loan Accounts (SLA) for the ECF and SCF amounted to SDR 0.1 billion and SDR 0.01 billion, respectively. Resources in the RCF Loan Account have been fully committed.12,13

12. Following the effectiveness of the April 2014 amendments to the PRGT Instrument, the Managing Director wrote to all current lenders to the PRGT requesting their consent to an extension through 2024 of the drawdown period under existing borrowing agreements. This extension will allow the agreements to be used to fund new ECF commitments (up to a maximum of four years) through 2020. As of end-March 2015, eleven out of fourteen members had provided their consent to the amendment of their borrowing agreements with the PRGT, representing 76.3 percent (SDR 7.5 billion) of the total borrowing agreements (Table 3). With these extended agreements, loan resources will be adequate to meet commitments at least through end-2016. Staff continue to follow up with the members that have not yet provided their consent. Staff will shortly approach both current and potential new lenders to the PRGT to mobilize additional PRGT loan resources to cover commitments through 2020.

B. Subsidy Resources

13. Total balances in the PRGT Subsidy Accounts at end-December 2014 amounted to SDR 3.4 billion (Table 4). In addition to the balances in the PRGT Subsidy Accounts, SDR 0.24 billion is assumed to be available from PRG-HIPC Trust (Table 4).14 PRGT Subsidy Account balances do not include amounts that were pledged but have not yet been received (see paragraph 16).

Table 4.

Balances of PRGT Accounts

(In billions of SDRs; as of end-December 2014)

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14. Pledges of bilateral subsidy resources under the 2009 LIC financing package for the PRGT stand slightly above the lower end of the target range of SDR 0.2–0.4 billion (end-2008 NPV terms). No additional subsidy pledges to the PRGT have been made since the October 2014 Update, beyond pledges of subsidy resources related to the two gold-related distributions. As of end-January 2015, a total of twenty-six members had pledged SDR 214 million in additional subsidy contributions, of which SDR 177.7 million have been received so far (Appendix Table 4). An amount of SDR 8.2 million in member contributions has also been made available following termination of the EPCA/ENDA subsidy account (Appendix Table 4).15 In addition, a deposit agreement with Indonesia that benefited the PRG-HIPC Trust, which matured in June 2014, was extended until end-2018; interest income of up to 2.0 percent earned on this deposit will benefit the PRGT (Appendix Table 3).

Appendix Table 4.

Pledges and Contributions of Bilateral Subsidy Resources for the PRGT

(In millions of SDR unless otherwise indicated; as of end-January 2015)

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1/

Transfer of members’ share in the balance of EPCA/ENDA Administered Subsidy Account upon the Account’s Termination on February 1, 2014 (see Update on the Financing of the Fund’s Concessional Assistance and Proposed Amendments to the PRGT Instrument, SM/14/79, April 8, 2014).

2/

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

3/

Reflecting end-December 2014 net income earned on the investment (in end-2008 NPV terms).

4/

Initial pledge of SDR 9.5 million has been changed to SDR 10.33 million to be paid in 8 tranches by January 2018.

5/

A pledge of SDR 16,709,643 is to be received following expiry of existing investment agreement with the PRGT on 12/31/2021; estimated as SDR 11 million in end 2008 NPV terms at the time when the pledge was made.

Appendix Table 3.

PRGT—Subsidy Agreements 1/

(In millions of SDRs; as of end-March 2015)

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1/

Agreements to provide subsidy contributions to the PRG Trust in the form of income earned on the deposit/investment in the Trust, net of below market rate of interest paid to the contributor on the principal of the investment. These do not include subsidies provided to the Trust as direct grants

2/

As a result of renaming of the PRG Trust and its subsidy accounts in January 2010, the name of subsidy account shown represents the current name of the account for deposits/investments that have not yet expired, and the old name of the account for deposits/investments that have been repaid.

3/

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

4/

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

5/

No interest is paid if net investment earnings are lower than 0.1 percent per annum.

6/

Interest rate paid was equivalent to the return on investment by the Fund on this deposit (net of any costs), less 2 percent per annum. If the interest rate obtained was less than 2 per annum, the deposit bore zero interest. The investment was extended in 2004 for another 10 years to benefit the HIPC Trust.

7/

This was a temporary deposit agreement, which matured on October 27, 2014, by the time of the conclusion of a new investment agreement. The PRGT General Subsidy Account had benefited from the investment income of up to 2 percent while any excess of the 2 percent investment income had to be for the benefit of Bank Indonesia.

8/

This deposit became effective on October 27, 2014, with the maturity of December 31, 2018, and replaced the temporary deposit agreement signed on June 30, 2014. The investment income of up to 2 percent related to the new deposit shall be transferred for the benefit of the PRGT General Subsidy Account and any excess of the 2 percent investment income shall be for the benefit of Bank Indonesia.

9/

Several deposits totaling SDR 10 million, which were repaid together at the end of sixteen years after the date of the first deposit in March 2010.

10/

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 PRG-HIPC Trust upon their maturities in 2011, 2011–14, and 2018, respectively.

11/

The investment coincides with the repayment of each of the first nine (out of ten) semiannual installments of a drawing of the PRGT loan of SDR 67 million from the Government of Spain (the Instituto de Crédito Oficial). The agreement expired in November 2012.

12/

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

13/

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.

15. The PRGT’s subsidy resources were augmented substantially by the successful distribution of windfall gold sale profits. The first partial distribution of SDR 0.7 billion of the Fund’s general reserves attributed to the windfall gold sales profits became effective in October 2012. As of end-March 2015, a total of 143 countries representing 94.2 percent of the distribution had pledged to contribute PRGT subsidies, and 129 members had effected their payments (85.6 percent of the total distribution). The second partial distribution of SDR 1.75 billion of Fund’s general reserves attributed to the windfall gold sales profits became effective roughly a year after the first, in October 2013. As of end-March 2015, a total of 155 countries had pledged 94.4 percent of the distribution and 132 members had effected their payments—81.4 percent of the total distribution (Appendix Table 5).

Appendix Table 5.

Distribution of the General Reserve Associated with Gold Windfall Profits 1/ (As of end-March 2015)

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1/

Madagascar was not approached with the request for contributing under either distribution; Sudan’s and Somalia’s shares were applied against their arrears.

2/

The distribution became effective on October 12, 2012 and was implemented on October 23, 2012. The amount distributed to members was based on the quota shares in place on the day the distribution was effected. Payments also include interest earned in Interim Administered Account on originally pledged amount, where applicable.

3/

The distribution became effective on October 10, 2013 and was implemented on October 22, 2013. The amount distributed to members was based on the quota shares in place on the day the distribution was effected. Payments also include interest earned in Interim Administered Account on originally pledged amount, where applicable.

4/

Member’s actual contribution differs from initial pledge on account of foreign exchange rates on value date of payment.

5/

The actual contribution includes interest earned in the Interim Administered Account.

6/

Switzerland pledged to contribute its shares under both distributions in five equal annual installments. The payment amount represents the installments to date.