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2022 REVIEW OF ADEQUACY OF POVERTY REDUCTION AND GROWTH TRUST FINANCES
April 2022
IMF staff regularly produces papers proposing new IMF policies, exploring options for reform, or reviewing existing IMF policies and operations. The following documents have been released and are included in this package:
A Press Release summarizing the views of the Executive Board as expressed during its April 4, 2022 consideration of the staff report.
The Staff Report prepared by IMF staff and completed on March 7, 2022 for the Executive Board’s consideration on April 4, 2022.
The IMF’s transparency policy allows for the deletion of market-sensitive information and premature disclosure of the authorities’ policy intentions in published staff reports and other documents.
Electronic copies of IMF Policy Papers are available to the public from
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International Monetary Fund
Washington, D.C.
© 2022 International Monetary Fund
Press Release
PR22/125
The IMF Concludes the 2022 Review of Adequacy of Poverty Reduction and Growth Trust Finances
FOR IMMEDIATE RELEASE
Washington, DC – April 21, 2022: On April 4, 2022, the Executive Board of the International Monetary Fund (IMF) reviewed the adequacy of the finances of the Poverty Reduction and Growth Trust (PRGT). The PRGT is the Fund’s main vehicle for providing concessional loans (currently at zero interest rates) to low-income countries (LICs). This was the first review since the comprehensive reform of the PRGT in July 2021, which raised the normal access limits for concessional lending to be in line with those for non-concessional lending and eliminated hard caps on access for the poorest members.
This review comes against the backdrop of continued high demand for PRGT lending which has been shifting from the emergency support that predominated in 2020 to multiyear Fund- supported programs. PRGT loan commitments were high at SDR 6 billion in 2021, only slightly below their peak of SDR 6.5 billion in 2020. The demand for PRGT lending is anticipated to remain elevated in 2022–24, with the outlook subject to considerable uncertainty, including due to the war in Ukraine.
As part of the July 2021 reforms, the IMF’s Executive Board approved a two-stage funding strategy to cover the cost of concessional lending to LICs through 2024 while also supporting the longer-term lending capacity of the PRGT. The first stage focuses on 2021–24 and aims to raise SDR 12.6 billion in PRGT loan resources and SDR 2.3 billion in contributions from member countries for subsidy resources (which enable lending at zero interest rates). Over half of the necessary loan resources – SDR 7.3 billion – have already been pledged. However, with pledges for only SDR 0.5 billion in subsidy resources received so far, efforts are ongoing to seek additional pledges and ensure the PRGT is adequately funded over the medium and long term. The second stage of the funding strategy will be implemented following a comprehensive review of concessional financing and policies in 2024/25.
In 2020–21 most of the resources required for debt relief initiatives were successfully mobilized. However, staff is working to mobilize additional grant resources to address the underfunding of the Catastrophe Containment and Relief Trust (CCRT)—which allows the IMF to provide grants for debt service relief for the poorest and most vulnerable countries—and replenish the cash buffer available to respond to future qualifying events.
Executive Board Assessment1
Executive Directors welcomed the first Review of the Adequacy of Poverty Reduction and Growth Trust (PRGT) Finances since the comprehensive reforms were approved in July 2021. They agreed that the PRGT had provided unprecedented and critical support to low-income countries (LICs) during 2020–21, particularly to meet pandemic-related challenges. Looking ahead, Directors considered it essential for the PRGT to continue supporting LICs to facilitate sustainable post-pandemic recovery and to cope with adverse spillovers from the war in Ukraine.
Directors welcomed the robust shift from emergency financing in 2020 toward multi-year Fund engagement. While the immediacy of the health crisis and sudden drop in global economic activity had necessitated an urgent response, they considered that close engagement under multi-year Fund-supported arrangements is better placed to lay the foundations for sustained recovery.
Directors expressed concerns that prospects for many LICs had been further disrupted by the war in Ukraine, with spillovers through pressures on food and fuel prices threatening social stability and food security, in addition to existing challenges. They considered that these adverse developments made it more likely that demand for concessional financing would remain elevated over the near and medium terms.
In that context, Directors were reassured by the expansion of LICs’ concessional borrowing space from the 2021 PRGT reforms. They underscored that PRGT arrangements could support LICs in developing appropriate policy responses to recent challenges. Directors also noted that the unprecedented increase in PRGT credit outstanding reduced the reserve account coverage ratio below its historical average and called for close monitoring. Directors welcomed staff’s assurances that the Board would be quickly alerted if the reserve coverage ratio is projected to drop below 20 percent. Moreover, they highlighted that risks from elevated lending levels should be mitigated by the Fund’s multilayered risk management framework, continued reliance on multi-year program engagement, and full implementation of the enhanced safeguards on debt sustainability and capacity to repay introduced in 2021.
Directors endorsed the resilient design of the two-stage funding strategy for the PRGT. While the Baseline lending scenario already allows for historically elevated lending until 2024, they welcomed that the strategy is sufficiently robust to accommodate a High Case scenario.
Directors concurred that, if such a scenario arose, additional subsidy needs would be addressed in the second stage of the funding strategy, as part of the next comprehensive review of the PRGT planned for 2024/25. The further use of IMF internal resources, including gold sales, would be carefully considered at that time to ensure the long-term sustainability of the PRGT. Many Directors, therefore, saw merit in commencing early analytical work on the potential use of internal Fund resources ahead of the second funding stage, while some other Directors emphasized the importance of waiting to undertake this work during the next review. A few Directors underscored that extending the suspension of the reimbursement of administrative expenditures to the GRA for a longer period would be a low hanging fruit to strengthen PRGT finances.
Directors welcomed the generous pledges for loan and subsidy resources made by many members. They expressed concerns, however, about the significant shortfall in the pledges compared to the loan and subsidy targets for the first stage of the funding package agreed in July 2021, especially in view of upside risks to PRGT demand and the potential risks to the PRGT’s self -sustained lending capacity. In this regard, Directors encouraged economically stronger members to contribute to the agreed broad burden-shared funding campaign and redouble their efforts to make pledges in a timely manner, utilizing the flexibility available in timing and modalities as needed. Directors also urged strong continued engagement by staff and management.
Directors agreed that PRGT finances were evolving broadly in line with the 2021 assessment and that more time was needed for efforts to mobilize PRGT resources to meet the agreed first stage funding targets. They considered that, while contingent measures are not warranted at the current juncture, recent developments reinforced the importance of keeping the adequacy of PRGT resources under close review. If significant resource shortfalls were to emerge, Directors noted that corrective measures could be taken if deemed appropriate. They therefore looked forward to the next annual Review of the Adequacy of PRGT Finances, while calling for interim informal updates as needed.
Directors noted that the Catastrophe Containment and Relief Trust (CCRT) remains underfunded and emphasized the need for additional grant resources to replenish its cash buffer. They looked forward to the comprehensive CCRT review planned for FY2023.
Title page
2022 REVIEW OF ADEQUACY OF POVERTY REDUCTION AND GROWTH TRUST FINANCES
March 7, 2022
EXECUTIVE SUMMARY
This paper provides the first review of the adequacy of PRGT finances since the comprehensive reform of the Poverty Reduction and Growth Trust (PRGT) in July 2021. The reforms included a 45 percent increase in the normal access limits for concessional financing to align them fully with those in the GRA, the elimination of hard caps on access for the poorest members, and the simplification of blending rules. The Board endorsed a two-stage funding strategy to cover the cost of pandemic-related lending and support the sustainability of the PRGT. The first stage, focusing on 2020–24, aims to secure an additional SDR 12.6 billion in PRGT loan resources and SDR 2.8 billion in new subsidy resources (which enable lending at zero interest rates), financed by a combination of internal resources and a broad burden-shared bilateral fundraising effort. The second stage, covering the period from 2025 onwards, will be preceded by a comprehensive review of the PRGT in 2024/25.
Annual demand for PRGT financing has continued to be high but is shifting from emergency financing to multiyear arrangements. PRGT commitments totaled SDR 6 billion in 2021, just slightly below the SDR 6.5 billion in commitments in 2020. The Baseline scenario anticipates continued elevated lending in 2022-24 of almost SDR 3 billion per year, around two-and-a-half times the historical annual average. A robust shift from emergency financing toward multiyear arrangements is underway, with emergency financing declining from almost 90 percent of PRGT commitments in 2020 to just over 10 percent in 2021.
The first stage of the funding strategy is progressing thanks to the generous responses of several PRGT contributors, but it is important to accelerate the pace of pledges, particularly for subsidy resources. SDR 0.5 billion in subsidy resources and SDR 7.3 billion in loan resources have been formally pledged so far. Although the mobilization of loans is proceeding well, supported by SDR channeling, there remains a significant shortfall in the pledges for subsidy resources. Staff are actively seeking additional pledges to make sure that the PRGT is adequately funded over the medium and longer term.
The second funding stage will follow a comprehensive Review of Concessional Financing and Policies in 2024/25. Conditional on raising the necessary subsidy resources under the first stage, the PRGT’s self-sustained lending envelope of SDR 1.65 billion per year beyond 2024 remains feasible. However, this envelope and associated funding needs will be reexamined in the 2024/25 review, which will be informed by the evolution of pandemic-related lending, an updated assessment of likely post- pandemic demand, and the outturn of the first stage fundraising efforts. The need to make further use of IMF internal resources would be carefully considered at that time, especially if the Board were to favor a significantly larger PRGT lending envelope and associated endowment.
The current two-stage PRGT financing framework is resilient to shocks. The loan resources being mobilized under the first stage are anchored on a High Case scenario which was designed to “stress test” PRGT resources in a tail-event episode, and hence can accommodate significant potential additional demand for PRGT financing, whether arising from a worsening of the pandemic, geopolitical developments, or other factors. Subsidy resources are anchored on a Baseline scenario with substantial levels of PRGT lending compared to the historical average. However, even under the High Case scenario, subsidy resources would not be depleted before the second stage of the funding strategy, at which time resource needs would be reassessed in the 2024/25 PRGT Review. This framework also allows for the possibility of corrective measures that could be implemented, if needed, in the context of the annual PRGT reviews.
In 2020/21 most of the resources required for debt relief initiatives were successfully mobilized, but the CCRT underfunding remains to be addressed. Pledges for Somalia and Sudan have exceeded the estimated costs for the Fund’s share of debt relief under the Heavily Indebted Poor Countries (HIPC) Initiative. However, additional grant resources are urgently needed to reduce the underfunding of the Catastrophe Containment and Relief Trust (CCRT) and replenish its cash buffer to respond to potential future qualifying events. A comprehensive review of the CCRT is planned for FY2023 to assess the appropriateness of its policies and the financing framework to ensure its sustainability.
Approved By
Bernard Lauwers
Prepared by the Finance Department in consultation with the Strategy, Policy and Review and Legal Departments. The staff team was led by Nelson Sobrinho, under the supervision of Charleen Gust and Joseph Thornton, and comprised of Huy Nguyen, Karmen Naidoo, Izabela Rutkowska, Elena Budras, and Ivetta Hakobyan, with inputs from Randa Sab, Marta Spinella, and Niklas Westelius. Ishita Dugar provided research assistance and Vera Lochan and Amy Miranda provided administrative support. Overall guidance was provided by Craig Beaumont and Christian Mumssen.
Contents
Glossary
INTRODUCTION
PRGT REFORMS AND FUNDING STRATEGY
PRGT LENDING: RESPONDING TO THE PANDEMIC
A. Recent Developments in PRGT Lending
B. Evolution of the Risk Profile
OUTLOOK FOR PRGT DEMAND
A. Shorter-Term Demand
B. Longer-Term Outlook
C. Capacity to Repay Implications
PRGT RESOURCES AND SELF-SUSTAINED CAPACITY
A. PRGT Loan Resources: Update and Mobilization
B. PRGT Subsidy Resources: Update and Mobilization
C. PRGT Self-Sustained Capacity
D. Reserve Account and Credit Protection
E. Contingency Measures
FINANCING OF DEBT RELIEF INITIATIVES
A. CCRT
B. HIPC Initiative
ISSUES FOR DISCUSSION
FIGURES
1. PRGT Fundraising Strategy and Targets, 2020–34
2. PRGT Key Statistics, 2008–21
3. PRGT Commitments, 2020–24
4. PRGT Credit Outstanding, 2017–34
5. PRGT Reserve Coverage, 2006–34
TABLES
1. PRGT Loan Resources
2. Balances of PRGT Accounts
3. New PRGT Subsidy Resources Pledged
4. PRGT Self-Sustained Capacity
ANNEXES
I. Options for Bilateral Subsidy Contributions
II. Updated Demand Model Projections
III. Updated Capacity Model Projections
IV. The Self-Sustained PRGT
APPENDIX
I. PRGT and Debt Relief Trusts—Statistical Update
Glossary
| CCRT | Catastrophe Containment and Relief Trust |
| DIA | Deposit and Investment Account |
| DSA | Debt Sustainability Analysis |
| ECF | Extended Credit Facility |
| EF | Emergency Financing |
| EMs | Emerging market countries |
| ESF | Exogenous Shock Facility |
| GLA | General Loan Account |
| GRA | General Resources Account |
| GSA | General Subsidy Account |
| HIPC | Heavily Indebted Poor Countries |
| IMF | International Monetary Fund |
| LICs | Low Income Countries |
| MDRI | Multilateral Debt Relief Initiative |
| NPA | Note Purchase Agreement |
| NPV | Net Present Value |
| PCDR | Post Catastrophe Disaster Relief Trust |
| PRG-HIPC | Trust for Special Poverty Reduction and Growth Operations for the Heavily Indebted Poor Countries and Interim ECF Subsidy Operations |
| PRGT | Poverty Reduction and Growth Trust RA Reserve Account |
| RCF | Rapid Credit Facility |
| RFI | Rapid Financing Instrument |
| RST | Resilience and Sustainability Trust |
| SA | Subsidy Accounts |
| SAF | Structural Adjustment Facility SCA-1 First Special Contingent Account SCF Standby Credit Facility |
| SDA | Special Disbursement Account |
| SDFI | Short-Duration Fixed-Income |
| SDR | Special Drawing Rights |
| SDRi | SDR Interest Rate |
| SLA | Special Loan Accounts |
| SRA | Subsidy Reserve Account |
| UCT | Upper Credit Tranche |
| WDI | World Development Indicators |
| WEO | World Economic Outlook |
At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be fou nd here: http://www.IMF.org/external/np/sec/misc/qualifiers.htm.
