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 Jan 2016
eISBN:
9781498345828
ISBN:
9781498345828
Language:
English
Keywords:
PP; The PRGT; SDR; lending; fund; resource; PRGT subsidy account balance; PRGT borrower
Download PDF (1.4 MB)

Better targeted support to LICs. In July 2015, the Executive Board approved measures to strengthen the financial safety net for low-income countries. Specifically, access norms and limits to the Poverty Reduction and Growth Trust (PRGT) resources were increased by 50 percent and the Rapid Credit Facility (RCF) interest rate was set permanently at zero. In addition, four countries graduated from PRGT eligibility. Together with a rebalancing of the mix of blended financing towards more use of general Fund resources for better-off PRGT-eligible countries, these reforms were broadly resource neutral and left the PRGT self-sustaining framework intact. Demand for PRGT resources up strongly. In 2015, demand reached SDR 1.5 billion, largely in response to shocks to commodity prices and adverse global financial market conditions. Demand is expected to remain elevated in 2016, as the global environment continues to be challenging.

Abstract

Better targeted support to LICs. In July 2015, the Executive Board approved measures to strengthen the financial safety net for low-income countries. Specifically, access norms and limits to the Poverty Reduction and Growth Trust (PRGT) resources were increased by 50 percent and the Rapid Credit Facility (RCF) interest rate was set permanently at zero. In addition, four countries graduated from PRGT eligibility. Together with a rebalancing of the mix of blended financing towards more use of general Fund resources for better-off PRGT-eligible countries, these reforms were broadly resource neutral and left the PRGT self-sustaining framework intact. Demand for PRGT resources up strongly. In 2015, demand reached SDR 1.5 billion, largely in response to shocks to commodity prices and adverse global financial market conditions. Demand is expected to remain elevated in 2016, as the global environment continues to be challenging.

Introduction

1. This paper reviews recent developments in the financing of the Fund’s concessional lending and debt relief operations since the April 2015 Update paper. The first section provides an update on reforms to the Fund’s concessional lending instruments and financing framework, including those related to the Fund’s Financing for Development initiative. The following section discusses the recent evolution and projections of demand for PRGT resources. Next, the paper covers the supply side, including an update of PRGT financing operations and estimates of PRGT capacity, ongoing loan mobilization efforts, and pending contributions. Other updates, including selected debt relief and arrears monitoring, are discussed in the final section.

The PRGT: Responding to Changing Needs

Key messages:

  • Access norms and limits were increased in July 2015 and the RCF interest rate was set permanently at zero, subject to the availability of subsidy resources in the Trust, to strengthen the safety net for LICs. Together with a shift of blended access to general Fund resources, these reforms were broadly resource neutral and left the PRGT self-sustaining framework intact.

  • Four members graduated from PRGT eligibility in 2015.

2. The framework for Fund concessional financing of LICs has been reviewed regularly to take account of changing needs. In July 2009, the IMF’s Executive Board approved a comprehensive reform of the IMF’s concessional facilities. Since then, PRGT lending has been executed under three facilities: the Extended Credit Facility (ECF), the Standby Credit Facility (SCF), and the Rapid Credit Facility (RCF). The 2009 reform also provided for the establishment of a general loan account, a general subsidy account, and facility-specific accounts. This has improved the flexibility of the Fund’s PRGT concessional financing framework (Box 1). In November 2014, the PRGT became self-sustaining when all current lenders approved the April 2014 amendments to the PRGT instrument.1

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.

uA01fig01

Poverty Reduction and Growth Trust Self-Sustainability

Citation: Policy Papers 2016, 002; 10.5089/9781498345828.007.A001

Source: Finance Department, International Monetary Fund.

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 (RCF, SCF, and ECF loan accounts, respectively), in addition to the 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.

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.

3. In 2015, the financial safety net for LICs was enhanced under the Fund’s Financing for Development initiative. To better target concessional assistance to the Fund’s poorest and most vulnerable member countries, access norms and limits to PRGT resources were increased by 50 percent and the interest rate for access to the RCF was set permanently at zero, subject to the availability of subsidy resources in the Trust.2 In addition, the blending ratio for combined access from PRGT and General Resources Account (GRA) resources was shifted to 1:2 (from 1:1 previously), which helps preserve scarce concessional financing for the poorest member countries while supporting increased access to GRA resources for PRGT eligible members with access to capital markets or relatively high income.

4. The above changes to the Fund’s concessional lending framework were designed to be resource-neutral. The PRGT operates under a self-sustained framework enshrined in a three-pillar strategy with the key objective to allow the Fund to make commitments of concessional lending to PRGT-eligible countries in the amount of about SDR 1¼ billion per year on average in perpetuity. The 2015 reform measures were designed to have a neutral impact on long-term demand for PRGT resources in order to be consistent with this framework.

5. Regular graduation from the list of PRGT-eligible countries continued in 2015. In the most recent bi-annual PRGT eligibility review in July 2015, the Executive Board approved the graduation of Bolivia, Mongolia, Nigeria, and Vietnam from PRGT eligibility, bringing total PRGT-eligible countries to 69. No new countries have been added to the PRGT-eligible list. In addition, the framework for graduation from the PRGT was streamlined by limiting the scope to delay the graduation of countries that otherwise meet the income and market access criteria if they are subject to short-term vulnerabilities.3 As intended, by subjecting PRGT eligibility to regular review, scarce PRGT resources will thus continue to be targeted towards the poorer and more vulnerable countries.4

Demand for PRGT Resources

Key messages

  • Demand for PRGT resources picked up strongly in 2015 on account of global shocks and will likely remain elevated in 2016 as the global environment remains challenging.

  • However, the recent sharp increase in PRGT demand is not unusual and long-term demand projections have increased only moderately.

6. Demand for PRGT resources increased sharply in 2015 (Figure 1). Compared to 2014, total commitments, under both new program arrangements and augmentations, more than doubled to SDR 1.52 billion (Table 1). This is significantly higher than the 20-year, pre-global crisis average of SDR 0.9 billion. Higher demand for concessional financing was largely driven by major global shocks, including the commodity price decline and tighter global financial conditions, and from countries negatively affected by security-related issues, the Ebola outbreak, and natural disasters (Figure 2). About 63 percent of the 2015 commitments was accounted for by two programs: an ECF arrangement for Ghana (SDR 664 million or 180 percent of quota) and a precautionary SBA-SCF arrangement for Kenya (of which SDR 136 million, or 50 percent of quota, from the PRGT). In addition, there were seven ECF arrangement augmentations, which amounted to SDR 246 million, including in response to the Ebola outbreak. Disbursements made in 2015 under a total of 25 financing arrangements and RCFs reached SDR 975 million, double their level in 2014 (Figure 3).

Figure 1.
Figure 1.

New PRGT Commitments, 1988–2015 (In millions of SDRs, as of end-December 2015)

Citation: Policy Papers 2016, 002; 10.5089/9781498345828.007.A001

Table 1.

PRGT Commitments in 2015–16 (In millions of SDRs; as of mid-March 2016)

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Consistent with PRGT blending rules, the SCF arrangements for Kenya are blended with SBA of SDR 352.82 million and SDR 709.259 million, approved respectively in February 2015 and March 2016; the authorities have indicated that they plan to treat both arrangements as precautionary. The RCF for Vanuatu was blended with SDR 8.5 million RFI.

Figure 2.
Figure 2.

External Drivers of Demand for Fund Concessional Assistance in 2015 1/

(in SDR million unless otherwise stated)

Citation: Policy Papers 2016, 002; 10.5089/9781498345828.007.A001

1/ Sum of categories exceeds 100 percent since some countries fall under more than one category.
Figure 3.
Figure 3.

Annual Disbursements to PRGT-Eligible Countries, 1988–2015 1/

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

Citation: Policy Papers 2016, 002; 10.5089/9781498345828.007.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; Bolivia, Mongolia, Nigeria, and Vietnam graduated in October 2015.

7. Demand is projected to remain strong in 2016 as global conditions are expected to remain challenging. Based on a staff survey of demand for PRGT resources in 2016 and actual data through end-March, PRGT demand could reach SDR 1.2–1.8 billion for the year, subject to upside surprises if large arrangements were requested, which could bring demand close to peak demand around the time of the global financial crisis.

8. However, long-term average annual demand projections for the Fund’s concessional loans are only moderately higher compared to previous estimates. The recent uptick in demand is not unusual. In fact, over the past 20 years, demand rose to levels significantly above long-term averages four times mainly on account of global downturns. Indeed, staff projections indicate that average long-term annual demand for concessional financing could range about SDR 0.9–1.9 billion over the next decade or two (Table 2). This range is only moderately higher than the estimates in the Financing for Development Board paper and the April 2015 Update paper, and reflects mainly downward revisions to long-term growth projections, which result in a somewhat slower pace of graduation from PRGT eligibility.5 The latter is mainly based on a per capita income criterion.6

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. Estimates incorporate the 50 percent increase in norms and limits approved in July 2015 in the context of the Financing for Development Initiative.

Based on 50 percent reduction in access norms and limits (in percent of quota) following the quota increase under the Fourteenth General Review of Quotas approved in 2016. Access in nominal SDR terms increases 24.2 percent at three-year intervals, starting in 2020. 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 a third of access to Fund resources is from the PRGT.

PRGT Resources and Capacity

Key messages:

  • Mobilization efforts to secure additional loan resources are receiving encouraging initial responses from existing and potential new lenders to the PRGT, but indications received so far amount to only half the target.

  • A number of countries have yet to fulfill their pledges of subsidy resources to the PRGT and PRG-HIPC Trusts. It is important for member countries to fulfill their pledges to support the Fund’s concessional lending operations.

  • Despite the challenging investment outlook, the PRGT has sufficient capacity to sustain annual lending commitments of about SDR 1.24 billion in perpetuity, broadly consistent with its target capacity (SDR 1¼ billion). This estimate is robust under a number of demand scenarios.

A. Loan Resources

9. The PRGT financing framework rests on a combination of loan resources, donor subsidy contributions, and the Fund’s own resources. Loan resources are provided by lenders to the PRGT at market rates, and are on-lent to PRGT-eligible members at subsidized rates. As of end-December 2015, loan resources were sufficient to cover anticipated demand through mid-2017. Net of a liquidity buffer of SDR 1.4 billion to meet possible encashment calls, uncommitted PRGT loan resources amounted to SDR 3.3 billion. Of the total uncommitted loan resources, the bulk (SDR 4.3 billion) were in the General Loan Account (GLA), with SDR 0.4 billion left in the ECF loan account. Resources under the RCF and SCF loan accounts have been fully committed.7, 8

10. Success of the current loan mobilization will be critical to ensure PRGT lending beyond 2016 and into the next decade. The Executive Board in April 2014 increased the PRGT cumulative borrowing limit and allowed staff to seek additional borrowing capacity for the PRGT of up to SDR 11 billion, which would be adequate to meet demand for loan resources under a number of scenarios described above.9 The current exercise is modeled along previous fund-raising rounds (Box 2) and aims to be more broad-based and inclusive by targeting 28 lenders, including 14 new potential lenders (Figure 4). The proposed new lenders are emerging and advanced economies that are, first, members of the current financial transactions plan and, second, among the largest 15 providers of financial resources to the GRA (among countries that are not currently PRGT lenders) based on at least one of the following criteria: i) quotas after the 14th Review; ii) NAB commitments prior to the implementation of the 14th Review of Quotas; and iii) 2012 GRA borrowing agreements.

2010 Loan Mobilization

The 2010 borrowing round mobilized SDR 9.8 billion in loan resources from 14 PRGT lenders. The bulk (SDR 6.2 billion) of new loan resources were made available to the General Loan Account, with the rest distributed among facility-specific accounts: ECF loan account (SDR 3.3 billion), and the SCF loan account and RCF account (SDR 300 million). In the April 2014 Update, the Executive Board approved measures to support PRGT lending through the medium term.1/ These included the extension of existing PRGT borrowing agreements and new borrowing agreements.

Commitments of Loan Resources to the PRGT 1/

(In millions of SDRs; as of end-January 2016)

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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.

Denmark changed media from USD to EUR on July 1, 2014.

NPA agreement with the United Kingdom was amended effective November 30, 2015 with regard to the undrawn SDR 1,312 billion to (i) benefit ECF account rather than GLA account as previously specified, and (ii) include a cap of 0.05 percent on the interest rate in place of previous SDR rate. The loan will generate implicit subsidy once the SDR rate increases above the current minimum.

Loan providers have made full use of the various vehicles under the enhanced framework for mobilizing bilateral loan resources.2/ Specifically, 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, introduced as part of the enhancements to the PRGT fund-raising framework.3/ Eight borrowing agreements provide loans to the PRGT in SDRs; all these contributors also have in place voluntary SDR trading arrangements. Since the start of SDR sales under these arrangements in June 2011 through end-February 2016, drawings amounting to SDR 2.82 billion have been made under the new SDR borrowing arrangements. SDR sales related to these drawings amounted to SDR 1.35 billion4/

1/ See Update on the Financing of the Fund’s Concessional Assistance and Proposed Amendments to the PRGT Instrument (April 8, 2014). Existing PRGT lenders have been requested to extend their borrowing agreements to 2024. Thirteen of the fourteen lenders have agreed to these extensions. The borrowing agreement with the remaining lender (France) has already been largely drawn down.2/ See Decision No. 14593 -(10/41), adopted 4/21/10.3/ Under the encashment regime, the PRGT provides participating lenders/note purchasers with the right to request early repayment of outstanding claims in case of balance of payments need. Participating lenders/note purchasers agree that drawings under their borrowing arrangements with the PRGT could be made to fund early repayment of other participating lenders that face a balance of payments need. The Fund repays the requesting lender by drawing down resources committed to the PRGT by other participating lenders, by means of a liquidity buffer of 20 percent of the loan amounts committed by lenders participating in the encashment regime. Participants in the encashment regime are: China, France, Italy, Japan, Korea, Saudi Arabia, and the United Kingdom.
Figure 4.
Figure 4.

Existing and Potential Lenders to the PRGT

(Grouped according to the proposed range of contributions)

Citation: Policy Papers 2016, 002; 10.5089/9781498345828.007.A001

Note: Highlighted in green are the current lenders to the PRGT that participated in the 2009/10 Fimdraismg Campaign.

11. As of end-February 2016, a significant number of existing and new lenders have expressed an interest in principle in providing new loan resources to the PRGT, but there is still some distance to cover to fully meet the target. All of the responses of existing lenders received so far have been favorable to the request in November 2015 by the Managing Director, expressing interest in entering into new agreements through 2024 at least as large as their existing loan agreements. Expressions of interest in principle in becoming new loan providers have also been received from several of the targeted emerging market and advanced economies. However, the amounts indicated so far represent about half of the SDR 11 billion target. It remains therefore important that members that have not yet formally responded to the Managing Director’s call express their interest in participating in the 2015 loan mobilization round.

B. Subsidy Resources

12. As of end-February 2016, total balances in the PRGT Subsidy Accounts amounted to SDR 3.5 billion (Table 3). In addition, SDR 235 million is presumed to be available from the PRG-HIPC Trust.10 PRGT Subsidy Account balances do not include amounts pledged but not yet received. Bilateral contributions have been made either in the form of grant contributions or of income on investments placed by contributors with the PRGT either at zero or below-market interest rates.11 IMF contributions originated with the initial 1970s gold sales. Distributions to member countries in 2012 and 2013 of windfall profits from the 2010 gold sales contributed significantly to the subsidy accounts. 12

Table 3.

Balances of PRGT Accounts (In billions of SDRs; as of end-February 2016)

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13. Since the previous Update paper, additional subsidy contributions of SDR 105 million to meet previous pledges have been received. Subsidy contributions have come mainly from the distributions of the general reserve attributable to windfall profits from the 2010 gold sales. As of end-March 2016, a total of 165 countries had pledged 95 percent of these profit distributions, of which 148 countries made their payments, amounting to 87 percent of the total distribution. Since the last Update paper, there have been SDR 2.9 million in payments to meet pledges for subsidy contributions from the fund-raising round under the 2009 LIC financing package for the PRGT.13

14. A number of countries have yet to fulfill their pledged contributions to the PRG and PRG-HIPC Trusts from various past fund-raising rounds (Appendix Tables 4–7). Amounts received remain below total pledges in all of the previous PRGT subsidy fund-raising rounds (Figure 5). These include fund-raising initiatives in the context of the 2005 Exogenous Shock Facility, the 2009 LIC financing package, and the 2012 and 2013 gold-related distributions. Total pending contributions amount to about SDR 221 million from 28 member countries. It is important for member countries to fulfill their pledges to support PRGT lending operations, particularly in light of the challenging global environment for LICs.

Figure 5.
Figure 5.

PRGT Subsidy Fund-Raising Campaigns: as of end-March 2016 (In billions of SDRs)

Citation: Policy Papers 2016, 002; 10.5089/9781498345828.007.A001

1/ Includes income earned on investment and deposit agreements; and, for gold-related distributions, value date exchange rate adjustments.2/ From a fund-raising target of SDR 0.2–0.4 billion.3/ From the distribution of SDR 0.7 billion in reserves linked to windfall gold sale profits.4/ From the distribution of SDR 1.75 billion in reserves linked to windfall gold sale profits.

C. Reserve Account

15. The PRGT reserve account continues to provide adequate security to PRGT loan providers and note purchasers. The reserve account is financed through profits from gold sales in the late 1970s, receipts from the Trust Fund, and investment income. This account provides security to the providers of loan resources to the PRGT and can meet the PRGT’s obligations vis-à-vis its creditors in the event of delayed payments by PRGT borrowers. As of end-February 2016, the balances under the reserve account stood at SDR 3.8 billion, which was significantly higher than total PRGT repayments falling due in 2016 and about 59 percent of total PRGT obligations. This ratio is substantially above the historical average of about 40 percent prior to the delivery of debt relief through HIPC and MDRI (Appendix Table 8).

D. PRGT Self-Sustained Capacity

16. The strategy of the self-sustaining PRGT, approved in September 2012, rests on three pillars: (i) a base average annual lending capacity of about SDR 1¼ billion; (ii) contingent measures which can be activated when average financing needs exceed the base envelope by a substantial margin for an extended period; and (iii) the expectation that all future modifications to LIC facilities be designed in a manner that is consistent with maintaining self-sustainability (Box 3).

Three-Pillar Strategy of the PRGT

A three -pillar strategy to ensure that the PRGT has sufficient resources to meet projected demand for IMF concessional lending over the long -term was set out in the paper Proposal to Distribute Remaining Windfall Gold Sales Profits and Strategy to Make the Poverty Reduction and Growth Trust Sustainable (09/17/12). It consists of:

  • A base envelope of about SDR 1¼ billion in annual lending capacity, which is expected to cover concessional lending needs over normal periods. While financing commitments can vary substantially from year to year, the self-sustaining PRGT can build up capacity in years with low levels of new lending commitments and draw down capacity in years when demand is high. This implies that the base envelope could cover periods where demand in individual years could be much higher, as long as fluctuations average out over a number of years.

  • Contingent measures that can be put in place when average financing needs exceed the base envelope by a substantial margin for an extended period. If the Executive Board considers that the self-sustaining capacity will decline substantially below SDR 1¼ billion, it could decide to activate a range of contingent measures, including: (i) reaching additional understanding on bilateral fund-raising efforts among a broad range of the membership; (ii) the suspension for a limited period of the reimbursement of the GRA for PRGT administrative expenses; and (iii) modifications of access, blending, interest rate, and eligibility policies to reduce the need for subsidy resources.

  • A principle of self-sustainability under which future modifications for low -income countries would be expected to ensure that the demand for IMF concessional lending can reasonably be met with the resources available under the first and second pillars under a plausible range of scenarios.1

1/ Specifically, any modifications to access, financing terms, blending, eligibility and other relevant policies would be expected to be designed in a way that average demand in normal periods could be covered through the resources available under the first pillar, and that periods of high financing needs, e.g., as a result of significant shocks, could be covered through the contingent mechanisms.

17. Under this framework, the reserve account would eventually be used to subsidize concessional financing. In 2014, amendments of the PRGT Instruments took effect, which allow the investment income from the reserve account to be used as another source of subsidization of PRGT lending as part of the PRGT self-sustained framework. Once the subsidy accounts are fully drawn, which is expected to take about two decades, the balance in the reserve account, including the cumulative returns of investment during this period, is anticipated to be sufficient to cover the subsidy needs for concessional lending and the administrative costs of the PRGT. This could be achieved without jeopardizing its primary role of providing security to PRGT lenders and note purchasers.

18. Despite a more challenging investment outlook, staff estimates that the PRGT has sufficient capacity to sustain average annual lending commitments close to its target of SDR 1¼ billion.14 The updated estimate of the PRGT’s permanent annual lending capacity, SDR 1.24 billion, incorporates the July 2015 reform measures discussed above, the increase in PRGT demand in 2015, new donor contributions, and updated projections for interest rates and investment returns (including the addition of the Chinese renminbi to the SDR basket).15 This estimate is slightly lower than the estimate in the April 2015 Update paper, mainly due to the subdued performance and outlook for investment returns on PRGT balances. A review of the Trust Asset Investment Strategy is planned for 2016.16 Furthermore, the estimate assumes that the temporary interest rate waiver on outstanding ECF and SCF credit would be allowed to lapse, as intended, upon its expiration at the end of 2016. In the context of the Financing for Development initiative in mid-2015, staff had estimated that an extension of the interest waiver, through end-2030, would lead to a significant reduction of the self-sustained annual capacity by about SDR 100–140 million (some 10 percent of the PRGT’s annual lending capacity), thus requiring significant contributions of new subsidy resources to restore the self-sustained annual lending capacity at SDR 1¼ billion.18

19. Consistent with the three-pillar strategy, estimates for the self-sustained lending capacity are robust under a number of demand scenarios. The sharp increase in commitments in 2015 had only a limited impact on the estimated self-sustained capacity compared with the estimate of the April 2015 Update paper. In the event that annual PRGT demand were to remain at SDR 1.5 billion in 2016 and reach about SDR 1.7 billion (or one standard deviation above the average of the last 15 years) in 2017 and 2018, the estimated self-sustained lending capacity would decline by about 2.7 percent (Figure 6). Similar results would hold if demand were to increase further to SDR 2.4 billion in 2017, resulting in two consecutive years of exceptionally high demand. While unprecedented by historical norms, such a scenario cannot be ruled out given the difficulties faced by many low-income countries in a challenging global environment. If these scenarios materialized, modest additional subsidy resources or other contingent measures consistent with the three-pillar strategy would be required to restore the Trust’s self-sustained annual lending capacity.

Figure 6.
Figure 6.

Self-Sustained Capacity and Reserve Account Coverage Under Peak Demand Scenarios

Citation: Policy Papers 2016, 002; 10.5089/9781498345828.007.A001

Source: Staff estimates, Finance Department.1/ Demand in 2017–18 is the average of 2000–15 plus one standard deviation.2/ Demand in 2017 is the average of 2000–15 plus two standard deviations.

Financing for Debt Relief

Key messages:

  • Despite generous pledges from 6 members, funding of the CCRT remains short of the target amount.

  • Following the delivery of debt relief to Chad, the HIPC initiative is largely completed.

  • Protracted arrears cases are being monitored closely.

20. In addition to concessional lending, the Fund also assists eligible low-income countries that are highly indebted or suffer from catastrophic natural disasters or fast-spreading public health crises with global spillover potential.

A. Catastrophe Containment and Relief (CCR) Trust

21. The CCR Trust was created in February 2015 in response to the Ebola outbreak in West Africa. The PCDR Trust was transformed into the CCR Trust with two windows: (i) one for catastrophic natural disasters; and (ii) a second for major public health disasters with the potential to spill over across international borders.19 The remaining balances in the PCDR Trust (SDR 102 million) were transferred to the CCR Trust. In addition, in February 2015, the MDRI-I Trust was liquidated and its residual balance (SDR 13.2 million) was transferred to the CCR Trust, and in August 2015, the MDRI-II Trust was liquidated and its residual balance (SDR 38.9 million) was transferred to the CCR Trust.20

22. The CCR Trust has so far extended debt relief to three countries severely hit by the Ebola crisis. These countries included Guinea (SDR 21.42 million), Liberia (SDR 25.84 million), and Sierra Leone (SDR 20.74 million). In addition, in 2010, Haiti received SDR 178 million in debt stock relief under the former PCDR Trust. As of end-December 2015, resources in the CCR Trust stood at SDR 137 million.

23. As of end-January 2016, total pledges for the CCR Trust from member countries (SDR 53 million) have reached only about one-half of the targeted amount. In February 2015, the Managing Director launched a fund mobilization campaign involving a broad group of 58 members from advanced and emerging market countries to raise bilateral contributions in the order of US$150 million to help put CCRT operations on a sustainable footing and enable the Fund to respond to future natural and public health disasters meeting the access criteria for assistance. So far, pledges amounting to US$89 million have been received from 6 members. With about half of responses still pending, it will be important that members who continue to deliberate and whose formal response remains outstanding come forward and make a contribution towards meeting the overall funding target.

B. Highly-Indebted Poor Countries (HIPC) Initiative

24. The HIPC initiative has been largely completed.21 As of end-February 2016, total debt relief delivered under the HIPC Initiative amounted to SDR 2.6 billion. A total of 36 out of 39 HIPC-eligible or potentially-eligible countries benefited from HIPC debt relief. Of the three remaining countries (Eritrea, Somalia, and Sudan) one has no outstanding obligations to the Fund and two have protracted arrears (see below). Chad was the latest country that received debt relief in the amount of SDR 17 million in April 2015. Financing for the HIPC initiative was sourced from the IMF’s gold sales and bilateral contributions.

25. Following Liberia’s HIPC completion point in June 2010, disbursements from a number of countries that pledged contributions to finance Liberia’s debt relief have not yet materialized. In 2008, the IMF and the World Bank committed to provide HIPC and beyond-HIPC debt relief for Liberia. A large number of member countries contributed to the financing package for debt relief for Liberia. Since the April 2015 Update paper, no further contributions have been received from the remaining eight countries that had pledged to contribute (Appendix Table 13). Pending contributions stand at SDR 17.7 million (March 2008 NPV terms). These contributions, once disbursed, would help replenish the PRG-HIPC Trust.

C. Protracted Arrears Cases

26. The number of protracted arrears cases has remained unchanged: Somalia, Sudan, and Zimbabwe.22 As of end-February 2016, total overdue financial obligations of these countries to the IMF amounted to SDR 1.3 billion, of which only Zimbabwe has overdue obligations to the PRGT, totaling SDR 78.9 million. Sudan accounts for the bulk or about ¾ of the total amount of arrears. Clearing these arrears has been complicated by domestic conflict, international sanctions, and the need for additional financial resources.

27. Providing debt relief for Sudan and Somalia would require additional financing. Debt relief for these countries was not included in the original cost estimates for the HIPC initiative. Hence, new financing would need to be secured once these countries are ready to clear their arrears and embark on the HIPC Initiative and possible “beyond-HIPC” debt relief.24, 25 The approach developed for Liberia’s debt relief, including the financing modalities, could provide a useful framework for Somalia and Sudan at the appropriate time. The resolution of Zimbabwe’s arrears would require measures outside the HIPC initiative since it is neither PRGT-eligible nor included in the list of “ring-fenced” countries that could benefit from the HIPC initiative.26

Appendix Table 1.

PRGT—Borrowing Agreements (In millions of SDRs; as of end-February 2016)

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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 SCF component of the loan has been extended till end-2024.

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 2.

Bilateral Commitments to the PRGF-ESF and PRG-HIPC Trusts 1/ (In millions of SDRs; as of end-December 2015)

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* Less than SDR 5,000.

Subsidy contributions pledged before 2006 to the benefit of the PRGF Trust, the remainder of which is now available for the PRGT, and for PRG-HIPC Trust.

Excludes SDR 100 million in end-2005 NPV terms committed by the G-8 to compensate for transfer from the PRGF Trust to the MDRI and subsidy resources pledged and/or received under fundraising rounds since 2006.

Estimated values of total contributions pledged before 2006. Amounts are reported on “as needed” basis and correspond to the nominal sum of contributions, earnings on outstanding balances, and estimated upcoming earnings on remaining balances (using a gross-up factor through 2015).

Amounts transferred in early 2006 from the PRGF Subsidy Accounts to the MDRI Trust.

Amounts reported on “as needed” basis, corresponding 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. Estimates were made at end-1999 in the context of HIPC fundraising based on members’ pledges.

Appendix Table 3.

PRGT—Subsidy Agreements 1/ (In millions of SDRs; as of end-March 2016)

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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.

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.

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.

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

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.

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.

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. The principal of the deposit is invested separately from other Trust’s assets.

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.

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.

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.

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.

Pledges and Contributions of Bilateral Subsidy Resources for the PRGT (In millions of SDR unless otherwise indicated; as of end-January 2016)

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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 , April 8, 2014).

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

Reflecting end-December 2015 net income earned on the investment (in end-2008 NPV terms).

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

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 5.

Distribution of the General Reserve Associated with Gold Windfall Profits 1/

(As of end-March 2016)

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

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.

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.

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

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

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