Update on the Financing of the Fund's Concessional Assistance and Debt Relief to Low-Income Countries
Author: International Monetary Fund. Strategy, Policy, &, Review Department, and International Monetary Fund. Finance Dept.
Publication Date:
24 Apr 2018
eISBN:
9781498308403
Language:
English
Keywords:
PP; SDR; lending; The PRGT reserve account; lending capacity; PRGT-eligible country; self-sustaining PRGT
Download PDF (1.4 MB)

"The Fund is adapting its framework for providing support to low-income countries (LICs) amid rising vulnerabilities. Despite a global economic upswing, many LICs continue to face difficult fiscal and external positions, aggravated by increasing debt levels and natural disasters in many countries. In this context, the Executive Board approved in May 2017 higher annual access limits under the Rapid Credit Facility (RCF) for balance of payment needs arising from large natural disasters and in May 2017 decided to keep the list of Poverty Reduction and Growth Trust (PRGT)-eligible countries unchanged notwithstanding rising per capita income levels. A comprehensive review of PRGT facilities is underway to consider potential adaptations of program modalities and access policies. PRGT demand in 2017 was above the historical average for the third year in a row. New commitments totaled SDR 1.7 billion, the highest level since the global financial crisis. Demand is expected to moderate somewhat in 2018. Longer-term demand estimates are broadly unchanged from last year’s update, and remain generally consistent with the self-sustaining PRGT financing framework adopted in 2012. Loan resources have been successfully replenished, while subsidy contributions remain somewhat below pledged amounts. The 2015 fundraising round mobilized slightly more than the initial target of SDR 11 billion in new loan resources from 15 PRGT lenders, which should provide adequate loan resources into the next decade. By contrast, progress has been limited in collecting the remaining pledged resources for subsidizing the interest on PRGT credit. The PRGT self-sustained capacity remains intact. The PRGT’s self-sustained long term average annual lending capacity is estimated at SDR 1.31 billion, broadly unchanged from last year’ estimate. While capacity estimates are sensitive to a variety of factors, they remain relatively close to the target of SDR 1¼ billion under a number of shocks. The Catastrophe Containment and Relief Trust (CCR Trust) remains underfunded. Funding is below the original targeted amount of new bilateral contributions totaling US$150 million, and the gap is more sizeable when considering the increase of members’ quotas under the 14th General Review of Quotas. To meet funding needs for future qualifying catastrophe relief, it is important that countries with outstanding pledges fulfill their commitments and for additional countries to come forward. Additional financing would be required to provide debt relief to members with protracted arrears. Debt relief under the Heavily Indebted Poor Counties (HIPC) Initiative is winding up, with only two potentially eligible countries left with outstanding Fund credit. These are the protracted arrears cases of Somalia and Sudan. Additional resources would be required to finance the Fund’s participation in debt relief when these countries are ready to undertake the HIPC Initiative process"

Abstract

"The Fund is adapting its framework for providing support to low-income countries (LICs) amid rising vulnerabilities. Despite a global economic upswing, many LICs continue to face difficult fiscal and external positions, aggravated by increasing debt levels and natural disasters in many countries. In this context, the Executive Board approved in May 2017 higher annual access limits under the Rapid Credit Facility (RCF) for balance of payment needs arising from large natural disasters and in May 2017 decided to keep the list of Poverty Reduction and Growth Trust (PRGT)-eligible countries unchanged notwithstanding rising per capita income levels. A comprehensive review of PRGT facilities is underway to consider potential adaptations of program modalities and access policies. PRGT demand in 2017 was above the historical average for the third year in a row. New commitments totaled SDR 1.7 billion, the highest level since the global financial crisis. Demand is expected to moderate somewhat in 2018. Longer-term demand estimates are broadly unchanged from last year’s update, and remain generally consistent with the self-sustaining PRGT financing framework adopted in 2012. Loan resources have been successfully replenished, while subsidy contributions remain somewhat below pledged amounts. The 2015 fundraising round mobilized slightly more than the initial target of SDR 11 billion in new loan resources from 15 PRGT lenders, which should provide adequate loan resources into the next decade. By contrast, progress has been limited in collecting the remaining pledged resources for subsidizing the interest on PRGT credit. The PRGT self-sustained capacity remains intact. The PRGT’s self-sustained long term average annual lending capacity is estimated at SDR 1.31 billion, broadly unchanged from last year’ estimate. While capacity estimates are sensitive to a variety of factors, they remain relatively close to the target of SDR 1¼ billion under a number of shocks. The Catastrophe Containment and Relief Trust (CCR Trust) remains underfunded. Funding is below the original targeted amount of new bilateral contributions totaling US$150 million, and the gap is more sizeable when considering the increase of members’ quotas under the 14th General Review of Quotas. To meet funding needs for future qualifying catastrophe relief, it is important that countries with outstanding pledges fulfill their commitments and for additional countries to come forward. Additional financing would be required to provide debt relief to members with protracted arrears. Debt relief under the Heavily Indebted Poor Counties (HIPC) Initiative is winding up, with only two potentially eligible countries left with outstanding Fund credit. These are the protracted arrears cases of Somalia and Sudan. Additional resources would be required to finance the Fund’s participation in debt relief when these countries are ready to undertake the HIPC Initiative process"

Introduction

1. This paper reviews recent developments in the financing of the Fund’s concessional lending and debt relief operations since the last update in April 2017. It reports the latest available data on pledges and contributions to the Poverty Reduction and Growth Trust (PRGT) subsidy and loan accounts, including an update on the recent loan mobilization round and the related increase in the PRGT borrowing limit.1 The paper also informs the stocktaking and identification of options in the context of the 2018 Review of Facilities for Low-Income Countries (LICs).

2. The paper is organized as follows. The first section presents recent developments of the Fund’s concessional lending instruments and the associated financing framework in the context of the current global environment. The following section describes recent PRGT loan commitments and disbursements and updates staff’s longer-term demand projections. The paper then examines PRGT resources, updating on efforts to mobilize loan and subsidy contributions. Consistent with the three-pillar strategy, the next section reports on estimates and the robustness of the self-sustained lending capacity under different scenarios. The last section highlights the shortfall of resources for the financing of debt relief under the Catastrophe Containment and Relief Trust (CCR Trust) and provides an update on arrears monitoring, clearance, and debt relief to Somalia and Sudan. The paper concludes with a proposed decision completing the annual review of the financing of the Trust’s concessional assistance and debt relief to LICs.3

The PRGT: Supporting LICs AMID Rising Vulnerabilities

Key messages:

  • Despite a global economic upswing, many LICs continue to face difficult fiscal and external positions, aggravated by shocks and rising debt levels.

  • In light of these vulnerabilities, no LIC was removed from the list of PRGT-eligible countries during the 2017 review, and the Executive Board approved higher annual access limits under the Rapid Credit Facility (RCF).

  • While providing the needed support to member countries, it is important to safeguard scarce financing resources amid growing risks.

3. Despite a global upswing, many LICs continue to face economic imbalances and a challenging outlook. Growth prospects for LICs are generally improving, supported by a strengthening global recovery. However, this more favorable outlook is subject to a range of risks, potentially including a reversal of the recovery in commodity prices, an unexpectedly sharp tightening of global financial conditions, domestic policy slippages, internal conflict, weather shocks, and financial sector stress. Moreover, there has been a broad-based weakening of fiscal positions in LICs in recent years. Total public debt and debt service have continued to rise, with almost half of PRGT-eligible countries now at high risk of debt distress or in debt distress, and one-third at “moderate” risk. Policy challenges are further exacerbated for those LICs that continue to experience conflict and security disruptions or are increasingly hit by severe weather events such as the recent drought-related food shortages in parts of sub-Saharan Africa or hurricanes in the Caribbean.

4. Against a backdrop of rising vulnerabilities, the Fund’s framework for concessional assistance has continued to adapt to better support eligible members. With the view of enhancing the financial safety net for developing countries, the Executive Board approved in May 2017 the establishment of a large natural disaster window within the RCF and Rapid Financing Instrument (RFI)4, with a new annual access limit of 60 percent of quota for urgent balance of payments needs arising from large natural disasters.5 In the most recent biennial PRGT eligibility review, the Board assessed the current eligibility framework to ensure it remains appropriate, and agreed to keep the list of PRGT-eligible countries unchanged, as those countries meeting the income and/or market access graduation criteria6 were assessed to be facing serious short-term vulnerabilities.7 In addition, a comprehensive review of the concessional facilities is expected to be completed this year to ensure continued adequate financial support to LICs.

5. Growing financial risks from rising debt vulnerabilities highlight the need for maintaining adequate lending standards (Box 1). The share of PRGT credit to countries at high risk of debt distress or in debt distress has risen to about 30 percent, the highest level since the global financial crisis. While it may increase further based on programs in the pipeline and the recent downgrades of Debt Sustainability Analysis (DSA) risks ratings of potentially large borrowers, lending safeguards under the Fund’s multilayered risks management framework will play an important role in mitigating financial risks for the PRGT.

Financial Risks to the PRGT and Lending Safeguards

PRGT country debt burdens and vulnerabilities have increased sharply in recent years. The fallout from the 2014 commodity price shock alongside delayed corrective policies have contributed to rising debt burdens in many LICs.1/ This is reflected in the marked deterioration in debt distress risk ratings among PRGT-eligible countries. The proportion of PRGT countries either at high risk of debt distress or in debt distress has nearly doubled since 2013, increasing from 25 percent to 45 percent at end 2017. At the same time, the demand for PRGT resources has increased sharply to average about SDR 1.3 billion during 2014–17, some 30 percent higher than the annual average before the global financial crisis.

uA01fig01

Risk of Debt Distress Ratings for PRGT Countries

(in percent of PRGT eligible countries1/)

Citation: Policy Papers 2018, 023; 10.5089/9781498308403.007.A001

1/ Based on a fixed sample of 70 PRGT–eligible countries as of end–2017 .

Rising debt vulnerabilities and sustained high demand for concessional resources pose financial risks to the PRGT. The total share of PRGT credit outstanding to vulnerable PRGT countries (i.e., countries at high risk of debt distress or in debt distress) has nearly tripled since 2013 increasing to about 30 percent at end 2017 (SDR 1.9 billion). This exceeds the peak observed following the 2008 global financial crisis and amounts to roughly half the PRGT reserve account balance. Moreover, credit risks within the group of vulnerable PRGT countries are increasingly concentrated in a small number of relatively large borrowers. Financial risks to the PRGT may increase further with potentially large program requests in the pipeline and fewer PRGT-eligible members presumed to use blended PRGT/GRA financing due to heightened debt vulnerabilities.

uA01fig02

PRGT Credit Outstanding by Debt Distress Risk Rating 1/

(in percent of total)

Citation: Policy Papers 2018, 023; 10.5089/9781498308403.007.A001

Sources: IMF Finance Data and Staff calculations1/ Outliers are Côte d’I voire and Democratic Republic of Congo, both of them constitute over 43 and 52 percent of high risk group’s total in 2010 and 2011, respectively; for 2012–13, Democratic Republic of Congo represents 32 and 42 per cent of high risk group’s total; for 2015–17, Ghana accounts for about 47 percent of high risk group’s total each year.

Against this backdrop, the Fund’s multilayered risk management framework plays an important role in safeguarding scarce concessional resources while providing the needed support to member countries. While credit risk is inherent to IMF operations, a comprehensive set of measures exist to mitigate such risk and safeguard the Fund’s limited concessional resources. In addition to the Fund’s de facto preferred creditor status, the IMF’s lending policies on access are central to minimizing risks to the PRGT’s lending portfolio. Beyond access norms and limits, mitigation tools when new arrangements are considered include phasing, program design, conditionality, assessments of central bank safeguards, non-concessional borrowing limits, and policies on arrears resolution. Financing requests include assessments of members’ capacity to implement adjustment policies and repay the Fund.

Note: Risks ratings are from the most recent Bank-Fund Debt Sustainability Analysis (DSA) for each PRGT-eligible country.1/ See Macroeconomic Developments and Prospects in Low-Income Developing Countries.

Demand for PRGT Concessional Lending

Key messages:

  • Demand for PRGT resources remained elevated in 2017, but may moderate somewhat in 2018.

  • Updated longer-term demand estimates are broadly unchanged from last year, and remain generally consistent with resources under the self-sustaining PRGT financing framework adopted in 2012.

6. Demand for PRGT resources in 2017 was elevated for the third year in a row (Table 1). While multi-year program commitments and observed annual disbursements are both measures of demand, Fund resources are managed on a commitment basis to ensure fulfillment of resource obligations. On either basis, the demand for concessional resources is historically very volatile and tends to move with economic cycles (Figures 1 and 2).

  • Total PRGT commitments in 2017 rose to SDR 1.7 billion, the highest amount since the global financial crisis in 2009. Eight new Extended Credit Facility (ECF) arrangements were concluded for a total of SDR 1.5 billion, five augmentations of access under PRGT arrangements were approved for SDR 223 million, and one RCF emergency loan of SDR 11.7 million was granted.

  • Disbursements in 2017, under a total of 20 financing arrangements and RCFs, amounted to SDR 724 million, compared with SDR 677 million in 2016, and the ten-year average of SDR 0.9 billion.9

Table 1.

New PRGT Commitments in 2017

(In millions of SDRs; as of end-December 2017)

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Blended GRA arrangement for an additional SDR 108 million.

Figure 1.
Figure 1.

New PRGT Commitments

(In millions of SDRs; as of end-December 2017)

Citation: Policy Papers 2018, 023; 10.5089/9781498308403.007.A001

Figure 2.
Figure 2.

Annual Disbursements to PRGT-Eligible Countries 1/

(In millions of SDRs; as of end-December 2017)

Citation: Policy Papers 2018, 023; 10.5089/9781498308403.007.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 in 2018 is expected to moderate somewhat. New commitments are projected to reach about SDR 1.2 billion in 2018 based on a staff survey and actual commitments data through end-March 2018. This compares to average annual commitments of SDR 1.3 billion over the past ten years. Mainly as a result of strong demand in recent years, disbursements would continue rising and could reach SDR 1.3 billion in 2018. However, these near-term demand projections are subject to considerable uncertainties surrounding the program pipeline and possible requests for high access or augmentations of access in the event of shocks.

8. Longer-term demand estimates are broadly unchanged from the previous update (Table 2). Given the considerable uncertainties around longer-term economic developments and use of PRGT resources, demand is projected using two benchmark scenarios (a low case and a high case). As in past years, the demand estimates reflect assumptions about countries’ rising income levels that affect the use of blending and eventual graduations from PRGT eligibility. They also take into account current policies on access, the effect on future demand of the new large natural disaster window under the RCF, and factor in periodic general increases in access norms and limits across facilities in the long run that broadly match projected GDP developments and potential financing needs of PRGT-eligible countries.10 Based on this analysis, annual demand is projected to average between SDR 1.0 and 1.7 billion over the next ten years, broadly consistent with the self-sustaining PRGT financing framework, which targets a long-run annual lending capacity of about SDR 1¼ billion (see section on PRGT Capacity below).11 Looking over a twenty-year horizon, the range of demand estimates is somewhat higher, although subject to even greater uncertainty.

Table 2.

Projected Demand for PRGT Resources Under Alternative Scenarios 1/

(In billions of SDRs)

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Based on historical data, the low-case scenario assumes that 30 percent of PRGT-eligible countries would resort to Fund financing, while the high-case scenario assumes 55 percent, in any given year.

For outer years assumes access level increases in nominal SDR terms by 24.2 percent every three years, starting in 2020.

Data from Update on the Financing of the Fund’s Concessional Assistance and Debt Relief to Low-Income Countries, adjusted for the specified projection time ranges.

Includes projected RCF demand for large natural disasters (see Large Natural Disasters—Enhancing the Financial Safety Net for Developing and Decision No. 16182–(17/35).

Sources of Financing for the PRGT

Key messages:

  • The 2015 loan mobilization campaign has exceeded the target of SDR 11 billion, and the PRGT borrowing limit was increased accordingly.

  • Progress has been limited on securing the remaining pledged subsidy contributions from past fund-raising rounds.

9. The operations of the PRGT are conducted through four Loan Accounts, four Subsidy Accounts, and the Reserve Account (Figure 3). Unlike lending under the General Resources Account (GRA), the PRGT operations are financed using an endowment model based on loan and subsidy resources. The balances accumulated in these accounts ensure the PRGT’s ability to provide concessional assistance on a self-sustained basis, its lending capacity, and financial strength.

  • Bilateral lenders provide loan resources. Loan accounts contain resources borrowed at three-month SDR interest rates or the six-month derived SDR interest rates from official creditors that are on-lent on a pass-through basis to PRGT-eligible countries. There are loan accounts dedicated to finance each PRGT facility (RCF, Standby Credit Facility (SCF), and ECF loan accounts), and a General Loan Account (GLA), which can finance any of the facilities.

  • The self-sustained trust provides subsidy resources. Subsidy accounts contain bilateral contributions from members, from the Fund’s own resources, and returns from the investment of their balances. The accounts provide the resources that enable the PRGT to extend loans to eligible members at below market interest rates although it acquires its loan resources at market interest rates. There are subsidy accounts dedicated to subsidizing interest payments for each PRGT facility (RCF, SCF, and ECF subsidy accounts), in addition to the General Subsidy Account (GSA), which may subsidize any of the facilities. The interest rate paid by member countries borrowing from the PRGT is subject to a mechanism that currently provides for zero interest on all PRGT credit.

  • The Reserve Account (RA) provides security to lenders. The RA was originally financed by the profits of gold sales in the late 1970s, reflows of the Trust Fund and Structural Adjustment Facility (SAF) repayments, as well as investment returns on balances held in it. The RA provides security to lenders to the PRGT and can meet obligations in the event of delayed payments by PRGT borrowers. It is also used to meet the Fund’s cost of administering PRGT operations. Under the self-sustained PRGT framework, once subsidy accounts are fully drawn (which is expected to take about two decades), the balance in the RA, including investment income, will be used to subsidize concessional lending.

Figure 3.
Figure 3.

PRGT Concessional Financing Framework

Citation: Policy Papers 2018, 023; 10.5089/9781498308403.007.A001

+ Reserve Account

A. Loan Accounts

10. Against a target of SDR 11 billion, the 2015 fund-raising round so far mobilized SDR 11.4 billion in new loan resources from 15 PRGT lenders, including two new lenders (Brazil and Sweden).12 Loan providers have committed these new resources through traditional loan agreements, Note Purchase Agreements (NPAs) and augmentations of existing agreements (Table 3). Nine lenders participate in the encashment regime of the PRGT.13 Five loan agreements are denominated in SDRs, five in euros, four in U.S. dollars, and one in renminbi. In January 2018, the cumulative borrowing limit under the PRGT was raised by SDR 1 billion to SDR 38.5 billion to accommodate the above-target level of new loan resources mobilized.14

Table 3.

New PRGT Loan Agreements

(In millions of SDRS; as of end-February 2018)

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11. Uncommitted PRGT loan resources, from both existing and new loan agreements, totaled SDR 13.9 billion at end-February 2018. While the bulk of loan resources (SDR 8.8 billion) are in the GLA, the rest is allocated among facility-specific accounts: ECF loan account (SDR 4.8 billion), the SCF loan account (SDR 150 million), and the RCF loan account (SDR 150 million). Uncommitted PRGT loan resources, net of a liquidity buffer of SDR 3.3 billion for possible encashment calls, are deemed sufficient to meet expected demand well into the next decade. Based on the amended PRGT Instrument, loan resources from previous mobilization rounds will be drawn before new resources are activated.15

B. Subsidy Accounts

12. At end-December 2017, total balances in the PRGT Subsidy Accounts amounted to SDR 3.6 billion (Table 4). In addition, SDR 239 million is presumed to be available from the PRG-HIPC Trust (see below).16 The Subsidy Accounts are financed through IMF and bilateral contributions from members, the latter being in the form of distributions of the windfall gold sale profits, grants or income on investments (Appendix Tables 6–7). PRGT Subsidy Account balances do not include amounts pledged but not yet received under various fund-raising rounds (Appendix Tables 2–5).

Table 4.

Balances of PRGT Accounts

(In billions of SDRs; as of end-December 2017)

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13. At end-February 2018, total pending subsidy contributions amounted to about SDR 178 million from 27 countries (Figure 4 and Appendix Table 8). Since the April 2017 Update paper, the Netherlands disbursed the last installment of SDR 1.4 million to complete its pledge under the 2009 fundraising round and SDR 39.6 million were received from Ireland, South Africa and Switzerland to meet pledges of subsidy contributions related to the distributions of the remaining reserves attributable to the windfall gold sale profits (Appendix Table 5). As of end-February 2018, about 89 percent of the total distributions of the general reserve attributable to windfall profits of the gold sales has been received, compared with the 95 percent pledged by 165 countries.

Figure 4.
Figure 4.

PRGT Subsidy Fund-Raising Campaigns

(In billions of SDRs; as of end-February 2018)

Citation: Policy Papers 2018, 023; 10.5089/9781498308403.007.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.

14. Income from bilateral deposit and investment agreements is still falling well short of pledged amounts. Seven member countries have pledged contributions to the PRGT to be fulfilled from investment returns on bilateral deposit and investment agreements. At end-2017, contributions generated from investment agreements reached only SDR 10.4 million in NPV terms compared with total pledges to the PRGT of SDR 61.4 million in NPV terms.17 In the context of the implementation of the new investment strategy for PRGT assets,18 investment agreements with Botswana, China, Morocco and Peru have been extended to allow for generating earlier pledged amounts that have not materialized due to the low return environment (Appendix Table 4). There are also twenty bilateral deposit agreements for the benefit of the PRG-HIPC trust that will expire in December 2018 (Appendix Table 7). Staff will contact the respective authorities in due course to discuss options for extension or repurposing of these agreements in order to generate additional subsidy contributions.19

C. Reserve Account

15. The PRGT Reserve Account continues to provide adequate security to PRGT loan providers. As of end-December 2017, the Reserve Account balance stood at SDR 3.8 billion, about SDR 64 million lower than at end-2016 as administrative fees reimbursed to the GRA exceeded net investment returns. The Reserve Account balance covers about 59 percent of total PRGT obligations and remains substantially higher than total PRGT repayments falling due in 2018 (Figure 5 and Appendix Table 9). The reserve ratio remains well above the 40 percent historical average prior to the delivery of debt relief through the HIPC and Multilateral Debt Relief Initiative (MDRI), and, absent large shocks to PRGT demand or credit portfolio (see below), is expected to gradually increase over the medium to long term.21

Figure 5.
Figure 5.

PRGT Reserve Coverage

(In SDR millions; as of end-December 2017)

Citation: Policy Papers 2018, 023; 10.5089/9781498308403.007.A001

PRGT Capacity: Assessing Adequacy and Self-Sustainability

Key messages:

  • The PRGT self-sustained capacity remains intact, at an estimated SDR 1.31 billion in annual lending capacity.

  • The PRGT’s lending capacity is generally robust to short-term demand shocks, but can be more sensitive to factors affecting the PRGT endowment, which requires regular monitoring.

16. In 2012, the Executive Board adopted a three-pillar strategy to make the PRGT’s concessional lending self-sustaining (Box 2). The strategy enables the IMF to provide assistance to LICs on a concessional basis without the need for regular grant fundraising rounds from its members. The resources to subsidize the interest on PRGT credit are derived from the balances and investment income in the Subsidy and Reserve Accounts as discussed above. The self-sustained PRGT framework requires regular monitoring of capacity and demand, and a set of policies―including on access, financing terms, blending, and PRGT eligibility―that are consistent with the principle of self-sustainability.

17. The PRGT’s self-sustained capacity is intact, with an estimated annual lending capacity of SDR 1.31 billion. This is broadly in line with the April 2017 Update. The self-sustained capacity is estimated based on a range of factors that impact both subsidy needs and available resources over the long-run. These include near-term PRGT demand and the level of credit outstanding, the balances of the PRGT Subsidy and Reserve Accounts, the investment returns22 on those balances, the subsidy element of PRGT loans,23 and the reimbursement to the GRA for administrative expenses.

18. The self-sustained lending capacity remains robust under different near-term demand shock scenarios. Demand for concessional resources is historically very volatile, especially on a commitment basis,24 which during 2000–17 ranged from SDR 65 million (2007) to a peak of SDR 2.5 billion (2009). In the event that annual PRGT demand were to remain at elevated levels in 2019–20, one-standard deviation over historical averages, the estimated self-sustained lending capacity would still remain above targeted capacity (Figure 6). However, under exceptionally high demand at two-standard deviations over the historical averages, capacity would fall to SDR 1.24 billion. Moreover, elevated demand would boost credit outstanding and reduce the reserve coverage ratio temporarily, although it would remain above 40 percent under most scenarios. In these circumstances, the Board could consider contingent measures under the three-pillar strategy, as demand would have exceeded the self-sustained capacity target by a large margin for six years running. Contingent measures may also be appropriate if longer-term demand estimates were to increase relative to the current ten-year range of SDR 1.0–1.7 billion (See section on Demand for PRGT Concessional Lending above and Box 2).

Figure 6.
Figure 6.

Self-Sustained Capacity and Reserve Account Coverage Under Peak Demand

Citation: Policy Papers 2018, 023; 10.5089/9781498308403.007.A001

Memorandum Items:Scenario 1 : Baseline demand in demand of 2003–17 in 2019–20 plus one standard deviation (SDR 1.7 billion).Scenario 2 : Demand in 2018 is the average of 2003–17 plus two standard deviations (SDR 2.3 billion).Scenario 3 : Demand in 2018 is SDR 2 billion; 2019–20 is the average of 2003–17 plus one standard deviation.Scenario 4 : Demand in 2018 is SDR 2 billion; 2019 is the average 2003–17 plus two standard deviations.

Three-Pillar Strategy of the Self-Sustaining PRGT Financing Framework

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. It consists of:

• A base envelope of about SDR 1¼ billion in annual average 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).

19. The viability of the self-sustaining PRGT requires regular monitoring of factors that directly impact the PRGT’s endowment. These include in particular investment returns of PRGT assets, payment of pledged contributions, the Reserve Account level (Table 5), the level of global interest rates and associated subsidization needs, and reimbursement to the GRA of the PRGT’s administrative expenses.

  • Consistent with the new investment strategy for PRGT assets approved by the Executive Board in 2017, staff estimates assume an average investment premium (excess return) over time of 90 basis points above the six-month derived SDR interest rates. If the long-run premium were to fall short by 40 basis points, it would reduce self-sustained capacity by about SDR 109 million, or nearly 9 percent of the lending capacity target.

  • By contrast, the impact of interest rate differences from the assumed profile for the SDR rate is relatively muted, as earnings on PRGT assets and net lending costs (interest paid to loan providers minus interest charged to borrowers under the PRGT interest rate framework) both adjust with interest rates and thus act to hedge the self-sustained capacity. When estimating the impact from a scenario that compares two long-run equilibrium interest rates (450 versus 350 basis points covering a range of historical averages before the global financial crisis), the capacity difference is only about SDR 19 million.

  • Baseline lending capacity estimates assume that all pledges will be fulfilled. Failure by Fund-members to fulfill some or all of their pledged subsidy contributions under previous fundraisings discussed above would entail a reduction in the PRGT’s self-sustained lending capacity of up to SDR 67.5 million. Conversely, to the extent that loan resources are remunerated at below market interest rates, such as the United Kingdom’s NPA, implicit subsidy contributions arise that can bolster lending capacity.25

  • An increase in administrative expenses relative to baseline assumptions, by SDR 10 million (relative to the assumed SDR 65 million) annually would entail a reduction in the PRGT’s self-sustained lending capacity of SDR 72 million.

  • Under the self-sustained PRGT framework, the investment income from the Reserve Account will eventually be used to subsidize concessional financing. However, a potential new case of protracted arrears would reduce the Reserve Account balance available for investment purposes. For illustration purposes, if only one medium or large PRGT borrower currently at high risk of debt distress were to completely default on its repayments the PRGT long-run lending capacity would drop between an estimated SDR 15 million to SDR 68 million, annually.26

Table 5.

Sensitivity of Self-Sustained Capacity

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Financing Debt Relief

Key messages:

  • The Catastrophe Containment and Relief Trust remains underfunded, both with respect to the original target and when considering the doubling of countries’ quotas under the 14th General Review of Quotas.

  • Disbursements of pledged contributions and commitments to provide necessary additional resources to finance debt relief are still pending from several members.

A. Catastrophe Containment and Relief Trust

20. The CCR Trust remains underfunded. Created in February 2015, the CCR Trust is designed to provide grants for debt relief to eligible countries27 under two windows: (i) the first dedicated to interventions after catastrophic natural disasters; and (ii) the second to be activated in case of major public health disasters with the potential to spill over across international borders. Operations were initially funded by repurposing the resources from its predecessor, the Post-Catastrophe Debt Relief (PCDR) Trust, together with residual MDRI-I funds, and transfers from members’ balances in the MDRI-II Trust (see Appendix 10).28 These initial funds were sufficient to grant support at the time of its establishment; however, additional resources are needed to enable the CCR Trust to meet funding needs for future qualifying catastrophe relief.29 Thus, at the time of its creation, a mobilization campaign called on 58 advanced and emerging market members to raise US$150 million (equivalent to SDR 106 million) in bilateral contributions. However, to date, only 6 members pledged to contribute a total amount of US$93.3 million (equivalent to SDR 59 million), of which US$82.3 million has been received, which is US$67.7 million short of the fundraising target. As of end 2017, the total CCR Trust contributions amount to SDR 97.8 million, for a total balance of the Trust of SDR 144 million.

21. New contributions are essential to strengthen the Fund’s emergency support to countries hit by catastrophic disasters. As about half of the responses from solicited members are still pending, it is critical that outstanding formal responses be translated into actual pledges and contributions to enhance the Fund’s emergency assistance. Moreover, it should be noted that the original fundraising target was based on the 13th General Review of Quotas. With CCR Trust debt relief in public health disasters generally capped at 20 percent of quota, the quota increases under the 14th General Review of Quotas are estimated to have increased the initial resource shortfall noted above by another SDR 100 million. Options for further enhancing CCR assistance under the forthcoming LICs Facilities Review will need to be considered alongside with proposals to address funding shortfalls and put the CCR Trust on a more sustainable footing.

B. Highly Indebted Poor Countries Initiative

22. The HIPC Initiative is nearly complete, having alleviated debt burdens in 36 out of 39 eligible countries. Debt relief delivered by the IMF under the HIPC Initiative has been financed from gold sales and bilateral contributions for a total amount of SDR 2.6 billion (Appendix Table 11). Three pre-decision point countries (Eritrea, Somalia, and Sudan) have yet to start the process of qualifying for debt relief under the Initiative. While Eritrea has no outstanding obligations to the Fund, Sudan and Somalia have protracted arrears (see section C below).

23. Outstanding pledges from eight countries, once disbursed, will replenish the PRG-HIPC Trust. The IMF and the World Bank jointly committed to provide HIPC and “beyond-HIPC” debt relief to Liberia in 2008. While a large share of the membership underwrote contributions to Liberia’s financing package for debt relief, pending contributions totaling SDR 17.7 million (March 2008 NPV terms) are yet to be received from eight countries (Table 6). While these countries had pledged to contribute to Liberia’s debt relief in 2008, the Trust provided for the shortfall in the interim.

Table 6.

Pending Disbursements to Finance Debt Relief to Liberia

(In millions of SDRs; in March 14, 2018 NPV terms)

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C. Protracted Arrears Cases

24. At end-February 2018, overdue financial obligations to the Fund from two protracted arrears cases totaled SDR 1.2 billion. Sudan and Somalia have been in arrears to the Fund since 1984 and 1987, respectively. Sudan accounts for the largest share of the total amount of the arrears (about 80 percent). Under a Staff-Monitored Program since 2016, Somalia is pursuing reforms to establish a track record of sound policy performance towards normalization of relationship with the international community and eventual debt relief. However, arrears clearance has been complicated by domestic conflict, international sanctions and the need for additional financial resources.

25. Providing debt relief for Sudan and Somalia would require additional financing, hence fundraising. The original cost estimates for the HIPC initiative did not account for debt relief for Somalia and Sudan. Thus, new resources would need to be raised once these countries are ready to clear their arrears and undertake the HIPC initiative and potentially “beyond-HIPC” debt relief.32, 33 When the time is appropriate, the approach developed for Liberia’s debt relief, including the financing modalities, could provide a useful framework for these two cases.

Appendix Table 1.

PRGT—Borrowing Agreements

(In millions of SDRs; as of end-February 2018)

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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.

Augmentation of existing agreement.

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 2017)

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* Less than SDR 5,000.

Pre-2006 fund-raising initiatives. 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 correspond to the nominal sum of contributions and earnings on outstanding balances.

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.

ESF Subsidy Contributions 1/

(In millions of currency units; as of end-December 2017)

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2005 Exogenous Shocks Facility (ESF) fundraising campaign.

To be generated as an implicit subsidy from the concessional loan at 0.5 percent or less.

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

Contributions received/generated in end-2005 NPV terms.

Trinidad and Tobago’s deposit matured on September 18, 2017 and was repaid before generating the pledged amount of contribution.

Appendix Table 4.

Pledges and Contributions of Bilateral Subsidy Resources for the PRGT

(In millions of SDR unless otherwise indicated; as of end-February 2018)

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2009 LIC fundraising campaign.

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 2017 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, last payment received in February 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 at 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 1/2/

(As of end-February 2018)

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Self-sustained PRGT fundraising campaign.

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 last installment was received on January 24, 2018.