Update on the Financing of the Fund's Concessional Assistance and Debt Relief to Low-Income Member Countries
Author:
International Monetary Fund
Search for other papers by International Monetary Fund in
Current site
Google Scholar Close
Publication Date:
10 Mar 2014
eISBN:
9781498342711
Language:
English
Keywords:
PP; SDR; PRGT; resource; lending; reserve account
Download PDF (1.5 MB)

New commitments under programs supported by the Poverty Reduction and Growth Trust (PRGT) amounted to SDR 0.6 billion during the first nine months of 2014, and disbursements on existing arrangements amounted to about SDR 0.3 billion through end-August. While this level of demand is low by historical standards, new commitments for 2014 as a whole could still exceed SDR 1 billion. These projections are, however, subject to considerable uncertainty regarding progress with ongoing program negotiations.

Abstract

New commitments under programs supported by the Poverty Reduction and Growth Trust (PRGT) amounted to SDR 0.6 billion during the first nine months of 2014, and disbursements on existing arrangements amounted to about SDR 0.3 billion through end-August. While this level of demand is low by historical standards, new commitments for 2014 as a whole could still exceed SDR 1 billion. These projections are, however, subject to considerable uncertainty regarding progress with ongoing program negotiations.

Introduction

1. This paper reviews recent developments in the financing of the Fund’s concessional lending and debt relief.1 It reports the latest available data including the pledges and contributions to the PRGT subsidy accounts resulting from the gold-profits-related distributions of reserves that became effective in October 2012 and October 2013. The PRGT’s potential self-sustained capacity is also discussed in the context of longer-term projections of the demand for concessional lending and robustness to alternative investment returns.2

2. The paper is organized as follows. Section II provides an overview of the Fund’s concessional lending instruments and the associated financing framework, as well as developments since the April 2014 Update. Section III reviews the sources of financing for PRGT operations, and discusses developments related to the PRGT framework. Section IV reviews the use of PRGT resources and current projections for demand. Section V discusses the potential implications of alternative scenarios regarding the demand for concessional resources, SDR interest rates, and investment returns. Section VI presents developments regarding the financing of debt relief under the HIPC, MDRI, and PCDR Trusts.

Concessional Financing and PRGT

3. Fund facilities for concessional financing of LICs have been reviewed regularly to take account of the changing needs of these countries. Lending facilities were reformed in 2009, and additional amendments were adopted in April 2013 as part of the LIC facilities review.3 Since 2010, lending by the PRGT has been conducted under three facilities, depending on the nature of the country’s needs and capacity: the Extended Credit Facility (ECF), the Standby Credit Facility (SCF), and the Rapid Credit Facility (RCF).

4. The concessional financing framework under the PRGT consists of three main types of accounts: Loan Accounts, Subsidy Accounts, and the Reserve Account. Resources in these accounts ensure both the Trust’s lending capacity and its financial strength (Box 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

Concessional Financing Framework

Citation: Policy Papers 2014, 017; 10.5089/9781498342711.007.A001

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

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

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. The RA is financed from the profits on gold sales by the IMF in the 1970s, and investment income from the investment of these resources. Under the self-sustained PRGT, the income earned on the balances in the account will be used to subsidize PRGT lending.

5. A LIC financing package, approved in July 2009 as part of the LIC reforms, was critical in supporting higher PRGT lending during the global financial crisis.4 This package included subsidy resources provided for by the first distribution of SDR 0.7 billion of the Fund’s general reserves attributed to the windfall gold sales profits.

6. In September 2012, the Executive Board approved a strategy to make the PRGT self-sustaining in the longer term.5 This strategy 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 would be designed in a manner that is consistent with maintaining self-sustainability (Box 2). Additional subsidy resources to support this lending capacity were to be provided by a second distribution of the Fund’s general reserves (SDR 1.75 billion) attributed to the remaining windfall gold sales profits. Under the terms of the decision, this distribution was effected only after members had provided satisfactory assurances that new amounts equivalent to at least 90 percent of the amount to be distributed would be transferred or otherwise provided to the PRGT. The required threshold was reached, and the distribution took place, in October 2013.

Strategy to Make the PRGT Sustainable

The three-pillar strategy to ensure the PRGT has the resources to meet projected demand for IMF concessional lending over longer term, set out in Proposal to Distribute Remaining Windfall Gold Sales Profits and Strategy to Make the Poverty Reduction and Growth Trust Sustainable (9/17/12), is as follows:

  • 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 with higher demand. 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 Board considers that the self-sustaining capacity would decline substantially below SDR 1¼ billion, it could decide to activate a range of contingent measures including (i) reaching additional understandings on bilateral fundraising efforts to be supported by 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, and interest rate and eligibility policies to reduce the need for subsidy resources.

  • A principle of self-sustainability under which future modifications to LIC facilities would be expected to ensure that the demand for IMF concessional lending can be met with the resources available under the first and second pillar under a plausible range of scenarios. 1/ It was noted, in particular, that the review of PRGT eligibility and the second stage of the review of facilities—completed in April 2013—should ensure that all modifications, taken together, would, over the longer term, keep demand consistent with available resources.

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.

7. The Executive Board also recently approved additional measures to implement the self-sustained PRGT and extend the commitment period for PRGT lending.6 These included amendments to the PRGT instrument adopted in April 2014 that would authorize: (i) the use of the Reserve Account investment income for PRGT subsidy operations, and (ii) PRGT commitments covering the period 2016–20. These amendments will come into effect following the receipt of consents from all lenders to the PRGT—a process that is currently underway. The Board also approved in April 2014 an increase in the borrowing limit for the PRGT by SDR 11 billion—from SDR 26 billion to SDR 37 billion—that would be sufficient to allow the Fund, if necessary, to meet a temporary period of high demand for concessional resources.

8. In December 2012, the Executive Board approved a two-year extension of the temporary interest waiver on PRGT loans through end-2014, as a means by which the Fund could provide continued support for LICs at a time when the global economic crisis was still ongoing.7 In view of the modest additional cost to the PRGT, the extension of the temporary waiver was considered to be consistent with the three-pillar strategy to establish a self-sustaining PRGT, though it remains important for the integrity of the agreed financing framework that the interest rate mechanism be allowed to function as was originally envisaged, once conditions return to normal.8 The next review of the interest rate mechanism of the PRGT is expected to be considered by the Executive Board by end-December 2014.

Sources of Financing for the PRGT

9. The 2009 LIC financing package, approved in July 2009 as part of the LIC reforms, allowed for the provision of enhanced financial support to LICs, which had been severely affected by the global economic crisis. The financing package, which sought to increase the Fund’s concessional lending capacity to SDR 11.3 billion for 2009–14, required the mobilization of new loan resources of SDR 10.8 billion (including a liquidity buffer of SDR 1.8 billion to enable a voluntary encashment regime) and new subsidy resources of SDR 1.5 billion (end-2008 net present value (NPV) terms).9 Most of the additional subsidies were to be financed from the Fund’s internal resources—including transfers from the PRGT Reserve Account, delaying until FY2013 the resumption of reimbursement of the GRA for PRGT administrative costs, and use of resources linked to gold sales profits as a means to facilitate new subsidy resources. Bilateral subsidy contributions of SDR 200–400 million (end-2008 NPV terms) were also important to complete the financing package. The Managing Director approached a wide spectrum of the membership in 2009 to mobilize the required loan and subsidy resources.

10. With the 2009 financing package having been completed, the focus has shifted to securing the resources required for concessional lending beyond 2015. As of end-August 2014, pledges for new bilateral subsidy resources—other than those made in the context of the two gold-related distributions of general reserves—exceeded the lower end of the targeted range of SDR 0.2–0.4 billion. The subsidy resources required to finance the self-sustained PRGT have also largely been secured following the effectiveness of the two gold-related distributions. In this context, staff efforts are currently focused on securing the amendments to the PRGT instrument discussed in paragraph 7 above and mobilizing additional loan resources to support the Trust’s lending capacity through 2020.

A. Loan Resources

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

Table 1.

New Commitments of Loan Resources to the PRGT 1/

(In millions of SDRs; end-August 2014)

article image

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.

12. Lenders to the PRGT have made use of all of the elements under the enhanced framework for mobilizing bilateral loan resources agreed in 2010.10 Loan resources have been provided through both traditional Loan Agreements and Note Purchase Agreements (NPAs), and seven members have included in their borrowing agreements participation in the encashment regime of the PRGT.11 Five of the borrowing agreements also have shorter initial maturities than in the case of traditional loan agreements.12 Eight of the new borrowing agreements provide loans to the PRGT in SDRs; all these contributors also have in place voluntary SDR trading arrangements.13 Since the start of the sales of SDRs under these arrangements in June 2011 through end-August 2014, drawings amounting to SDR 2,081 million have been made under the new SDR borrowing agreements. Sales of SDRs related to these drawings amounted to SDR 1,105 million. The difference reflects the borrowing members’ acquisition of SDRs to replenish their SDR holdings. These sales were conducted through the voluntary SDR trading arrangements.

13. Uncommitted PRGT loan resources amounted to SDR 6.9 billion at end-June 2014. The bulk of these uncommitted loan resources were in the GLA, amounting to SDR 6.1 billion. At end-June 2014, resources available in the Special Loan Account (SLA) for the ECF amounted to SDR 0.7 billion.14,15

14. Once the current lenders to the PRGT have consented to the amendments to the PRGT instrument approved by the Executive Board in April 2014, staff will seek new loan resources needed to support the Trust’s lending commitment capacity through 2020. While existing loan resources are expected to be adequate to meet new commitments through 2015, it is important that all the needed consents are obtained by end-2014 to enable new loan resources to be put in place promptly. Fund staff plans to communicate with current and possible prospective lenders to the PRGT to seek the additional PRGT loan resources sufficient to cover commitments through 2020.

B. Subsidy Resources

15. Total balances in the PRGT Subsidy Accounts at end-June 2014 amounted to SDR 3.3 billion. In addition to the balances in the PRGT Subsidy Accounts, SDR 0.2 billion is assumed to be available from PRG-HIPC Trust.16 PRGT Subsidy Account balances do not include amounts that were pledged but have not yet been received, such as those made in the context of fundraising for the Exogenous Shocks Facility (ESF), the 2009–14 financing package, or earlier fundraising rounds (Tables 2–4), and the outstanding pledges from the gold-related distributions of reserves (Appendix Table 7).

Table 2.

ESF Subsidy Contributions

(In millions of currency units; end-June 2014)

article image

To be generated from the concessional loan as an implicit subsidy.

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

Table 3.

PRG-HIPC Trust—Pending Contributions

(In millions of SDRs “as needed”; end-June 2014)

article image

Remaining balances.

Table 4.

Pledges and Contributions of Bilateral Subsidy Resources for the PRGT

(In millions of SDR unless otherwise indicated; end-July 2014)

article image

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

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

Reflecting end-June 2014 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 7.

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

(As of end-September 2014)

article image
article image
article image
article image

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 first installment.

16. Pledges of bilateral subsidy resources under the 2009 LIC financing package for the PRGT stand slightly above the lower end of the target range of SDR 0.2–0.4 billion (end-2008 NPV terms). As of end-September 2014, a total of twenty-six members have pledged SDR 214 million in additional subsidy contributions, of which SDR 169.2 million have been received so far. An amount of SDR 7.1 million in member contributions has also been made available following termination of the EPCA/ENDA subsidy account (Table 4). Staff will continue to seek additional bilateral subsidy resources, which will help make the self-sustained PRGT more robust over a wide range of demand scenarios.

17. The PRGT’s subsidy resources have been augmented substantially by the successful distribution of windfall gold sale profits. The first partial distribution of SDR 0.7 billion of the Fund’s general reserves attributed to the windfall gold sales profits became effective in October 2012. As of end September 2014, a total of 143 countries representing 94.2 percent of the distribution had pledged to contribute PRGT subsidies, and 127 members had effected their payments (84.4 percent of the total distribution). The second partial distribution became effective roughly a year after the first—in October 2013. As of end September 2014, a total of 155 countries had pledged 94.4 percent of the distribution and 128 members had effected their payments (80.2 percent of the total distribution). Additional contributions linked to these distributions are still expected from members (Appendix Table 7).

C. Reserve Account

18. The PRGT Reserve Account continues to provide adequate security to PRGT lenders and note purchasers. The Account was originally financed by reflows of Trust Fund and Structural Adjustment Facility (SAF) repayments, as well as investment returns on balances held in the Account. The PRGT can tap these resources temporarily to meet its obligations in the event of a delayed payment by a borrower to any loan account of the Trust. The balance in the Reserve Account amounted to SDR 3.9 billion at end-June 2014, representing a substantial multiple of the projected PRGT repayments falling due over the next twelve months, and about 64 percent of total PRGT obligations—well above the historical average of about 40 percent (Appendix Table 4).

Appendix Table 4.

PRGT Reserve Account Coverage

(In millions of SDRs; end-period)X

article image

The decline in total PRGT credit outstanding by about 40 percent from 2005 reflects early repayments arising from the delivery of HIPC and MDRI debt relief.

19. The self-sustained PRGT is premised on the eventual use of investment income from the Reserve Account to subsidize PRGT lending. Under the framework endorsed by the Executive Board in September 2012, new concessional lending will initially be subsidized by using and gradually drawing down the available balances in the PRGT subsidy accounts, including the investment returns on these accounts. During this period, projected to extend over at least a decade, the balance in the Reserve Account will increase by the amount of investment returns on the Reserve Account balances. By the time the resources in the subsidy accounts have been exhausted, it is envisaged that the size of the Reserve Account will have increased to a level such that the net earnings in the Reserve Account are sufficient to cover the subsidy needs for annual PRGT lending and the projected administrative cost of the PRGT.

Demand for PRGT Concessional Lending

20. During 2009–13, average annual lending commitments were about SDR 1.3 billion, peaking in 2009 at SDR 2.5 billion with 18 new arrangements. Average commitments during this period were significantly higher than the average annual PRGT commitments of SDR 0.9 billion during 1988–2007, but some SDR 0.6 billion per year below the level that could have been accommodated by the 2009 financing package. From January 2010, when the new structure of LIC facilities became effective, through end-September 2014, total commitments under the ECF, including augmentations, amounted to SDR 4 billion, while commitments under the SCF and RCF amounted to SDR 0.36 billion and SDR 0.30 million, respectively.

21. Demand for PRGT resources was unusually low in 2013 and 2014 to date, but could rebound during the last quarter of 2014 and beyond. Commitments under new PRGT arrangements amounted to about SDR 0.15 billion in 2013 and SDR 0.6 billion through end September 2014 (Table 5)—well below the SDR 1.5 billion committed in 2012 or SDR 1.2 billion committed in each of 2010 and 2011 (Figure 1). Disbursements from January through end August 2014 amounted to about SDR 0.3 billion (Figure 2). Nevertheless, PRGT demand could pick up during the last quarter of 2014, and possibly exceed SDR 1 billion for the year as a whole, depending on the timing of some relatively large arrangements still being considered. This level of commitments in 2014 would be consistent with the PRGT’s average annual self sustained capacity.

Table 5.

New PRGT Commitments to LICs in 2014

(In millions of SDRs; as of end-September 2014)

article image

Approved by the Board on September 26, 2014 with disbursement scheduled for October 2, 2014.

Figure 1.
Figure 1.

PRGT Commitments to LICs, 1988–2014

(In millions of SDRs; as of end-September 2014)

Citation: Policy Papers 2014, 017; 10.5089/9781498342711.007.A001

Figure 2.
Figure 2.

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

(In millions of SDRs; as of end-August 2014)

Citation: Policy Papers 2014, 017; 10.5089/9781498342711.007.A001

1/ In April 2010, Albania, Angola, Azerbaijan, India, Pakistan, and Sri Lanka graduated from the PRGT; Armenia graduated in July2013; Georgia graduated in April 2014.

22. Updated staff projections indicate that average longer-term demand for the Fund’s concessional lending could be in the range of about SDR 1.0–1.6 billion annually through 2037 (Table 6). These projections are similar to those presented in the last Update and are consistent with expectations following the adoption of a moderate expansion of blending rules, the graduation of two members, and the entry of new PRGT-eligible members, as approved in April 2013.17 In the context of the recently-approved framework for concessional lending on a self-sustained basis, this level of demand compares to the PRGT’s basic annual capacity to support concessional lending of about SDR 1¼ billion.

Table 6.

Projected Demand for PRGT Resources Under Alternative Scenarios 1/

(In billions of SDRs)

article image

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 PRGT-eligible countries request some form of Fund financial support in any given year.

Based on 50 percent reduction in access norms and limits (in percent of quota) when the quota increase under the Fourteenth General Review of Quotas goes into effect (assumed to occur in 2015), followed by increases in access in nominal SDR terms of 24.2 percent at three-year intervals, starting in 2016. The baseline also incorporates other methodological issues such as (i) applying the vulnerability criterion to the graduation and blending assumptions; and (ii) aligning the graduation assumptions with the two-year PRGT-eligibility review cycle.

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

Self-Sustained PRGT Capacity

23. Fund staff estimates that the PRGT has sufficient capacity to sustain annual lending commitments of about SDR 1¼ billion on average. The successful distributions of gold windfall profits were key steps toward making the PRGT sustainable over the medium and longer term. This estimate is slightly lower than that reflected in the April 2014 Update, primarily reflecting the subdued outlook for investment returns on the PRGT over the near term.

24. In the context of the three-pillar strategy, the framework for self-sustained lending under the PRGT is robust under a number of demand scenarios. Lower commitments in 2013 and 2014 to date have had only a modest impact on the estimated self-sustained capacity from 2015. The PRGT’s self-sustained capacity would also not be significantly affected in the event that annual demand for financing were to remain modestly elevated (i.e., above SDR 1.25 billion) for a few years. Nevertheless, staff analysis suggests that new subsidy resources or other contingent measures consistent with the three-pillar strategy could be required in order to bring the Trust back to a self-sustained lending capacity of SDR 1¼ billion in the event that demand for resources remained significantly elevated for a sustained period (Table 7).

Table 7.

Self-Sustainable PRGT Capacity Under Elevated Demand Scenarios 1/

(In billions of SDRs)

article image

Tested for elevated demand during 2015–20 with resulting annual capacity following thereafter.

Amount of additional subsidies needed after the time of elevated demand (during the next 2,4,6 years) to return to SDR 1.25 billion annual capacity.

SDR 1.43 billion reflects average commitments during 2008–12.

25. The Reserve Account continues to provide a high level of security to PRGT lenders. Under the self-sustained framework, the Reserve Account is projected to stabilize at a level that provides the necessary subsidy resources indefinitely without jeopardizing its primary purpose of providing security to PRGT lenders and note purchasers (Figure 3). As noted above, Reserve Account balances were equal to approximately 64 percent of outstanding PRGT lending at end-June 2014―well above the historical average of about 40 percent. Staff estimate that if demand for concessional lending were to be maintained at the self-sustained capacity of SDR 1¼ billion annually, the reserve ratio would remain well above the 40 percent historical average, and rise substantially over the medium and longer terms. A period of sustained high demand early in the projection period, which raises outstanding credit at a time when the Reserve Account has not yet grown significantly from the reinvestment of investment returns, could temporarily lower the reserve coverage ratio below the historical average. However, even in this extreme scenario—which would warrant decisions under the three-pillar strategy to safeguard the sustainability of the PRGT—the coverage ratio would be projected to remain above historical levels witnessed in the 1990s, and rise well above the 40 percent threshold over the medium and long term.

Figure 3.
Figure 3.

Reserve Coverage Ratio under Different Demand Scenarios, 2015−40

Citation: Policy Papers 2014, 017; 10.5089/9781498342711.007.A001

26. Sensitivity analyses suggest that the PRGT’s self-sustained capacity would be only marginally affected by changes regarding the assumed evolution of SDR interest rates. The reason for this relative insensitivity is that this rate affects both the earnings on the PRGT’s investment portfolio and the cost of borrowing paid on loans from PRGT lenders. However, the self-sustained capacity is somewhat sensitive to assumptions regarding the investment performance (i.e., the excess return over the SDR interest rate) of the PRGT accounts over the medium to long term. The current projections assume subdued investment returns in the near term, but have retained the previous longer-term assumptions, pending a Board review of the investment strategy for these funds planned for 2015.

Financing of Debt Relief

27. As of end-June 2014, the Fund had provided a total of SDR 5.2 billion of debt relief to eligible countries. This includes HIPC assistance of SDR 2.6 billion to 36 countries (Appendix Table 5), MDRI debt relief of SDR 2.3 billion to 30 countries, “beyond-HIPC” debt relief to Liberia (Appendix Table 6), and PCDR debt relief to Haiti.18 The only remaining decision point country is Chad, which at end-June 2014 had received HIPC interim assistance of about SDR 9 million from the Fund. No debt relief has been provided through the PCDR Trust since the last Update, and the balance in the PCDR Trust was SDR 0.1 billion at end-June 2014.

Appendix Table 5.

Implementation of the HIPC Initiative

(In millions of SDRs; end-June 2014)

article image

Includes the commitment made in NPV terms plus interest earned on that commitment.

At the time of its decision point, Afghanistan did not have any outstanding eligible debt.

Includes commitment under the original HIPC Initiative.

Côte d’Ivoire reached its decision point under the original HIPC Initiative in 1998, but did not reach its completion point under the original HIPC Initiative. Debt relief of SDR 17 million, committed to Côte d’Ivoire under the original HIPC Initiative, was therefore not delivered.

Appendix Table 6.

Debt Relief Following Implementation of the MDRI

(In millions of SDRs; end-June 2014)

article image

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

Balances available at the time of MDRI debt relief.

Afghanistan, Comoros, Haiti, and Togo did not have MDRI-eligible credit and did not receive MDRI debt relief. Côte d’Ivoire and Guinea had fully repaid MDRI-eligible debt by completion point date.

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

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

Including Liberia’s beyond HIPC debt-relief.

A. Remaining HIPCs and Status of the MDRI

28. The Fund’s cost of debt relief for the remaining HIPCs (excluding the protracted arrears cases) is estimated at SDR 0.01 billion in end-June 2014 NPV terms (Table 8).19 This estimate excludes the arrears cases and is based on assumptions regarding timing of the HIPC completion point and the future path of interest rates, all of which are subject to uncertainty. Moreover, the estimate does not take into account potential needs for topping-up assistance.

Table 8.

Financing of Debt Relief to the Remaining HIPCs 1/

(In billions of SDRs; end-June 2014 NPV terms)

article image

Totals may not add up due to rounding.

Since the HIPC sub-account is depleted, resources of SDR 0.01 billion are expected to be drawn from the PRG-HIPC sub-account to meet the estimated cost of the remaining HIPCs.

29. Available resources in the PRG-HIPC Trust are estimated to be sufficient to cover debt relief for the remaining eligible countries (excluding the protracted arrears cases). Since the HIPC sub-account of the PRG-HIPC Trust has been depleted, resources of about SDR 0.01 billion from the PRG-HIPC sub-account are expected to be used to cover the projected HIPC needs. At end-June 2014, the PRG-HIPC sub-account resources amounted to SDR 0.2 billion in NPV terms (Table 8).

30. Fund staff will initiate the work to prepare for the liquidation of the MDRI-I and MDRI-II Trusts. The last of the MDRI-eligible debt was repaid in FY2014. At end-June 2014, the resources in the MDRI-I Trust and MDRI-II Trust amounted to SDR 13 million and SDR 39 million, respectively (Table 8). The MDRI Trust instruments stipulate that the Trustee can decide to wind up the operations of the Trusts.20 Under the terms of the instruments, the remaining balances available within the MDRI-I Trust representing the Fund’s share in the distribution would then be transferred to the Special Disbursement Account, while those within the MDRI-II Trust would be transferred to the PRGT for use in any current or future subsidy operations authorized for that Trust, unless a contributor specifically requests the return of its share of unused resources. In the event that bilateral shares of the remaining balance in the MDRI-I I Trust were transferred to the PRGT, these would bolster the PRGT’s self-sustained lending capacity. Fund staff will initiate consultations with the 37 bilateral contributors to the MDRI-II Trust regarding their instructions for the disposition of remaining balances, and revert to the Board accordingly.

B. Pending Contributions to Liberia’s Debt Relief

31. Following Liberia’s HIPC completion point, there still remain a number of countries that have yet to finalize their pledged contributions to the Fund’s debt relief for Liberia. Since the last Update, no further contributions have been received from the remaining countries who had pledged to contribute. Pledged contributions totaling SDR 17.7 million (March 2008 NPV terms) from eight members are yet to be received (Table 9). It remains important that these contributions be disbursed as soon as possible to replenish the PRG-HIPC Trust.

Table 9.

Pending Disbursements to Finance Debt Relief to Liberia as of end-June 2014

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

article image

32. The SCA-1/Deferred Charges Administered Account holds a balance from one member (Brazil). In March 2014, the Executive Board approved a decision to delay the termination date of the account to March 13, 2016, to allow additional time for completion of the procedures that would enable the disbursement of the pledged contribution for financing Liberia’s debt relief.21 It is expected that this amount would by that time be transferred to the PRG-HIPC Trust, which financed the shortfall in members’ contributions relative to their commitments for the financing of Liberia’s debt relief.

C. Protracted Arrears Cases

33. Providing debt relief to Somalia and Sudan would require substantial additional resources. At end-August 2014, the total amount of overdue financial obligations of these two countries to the IMF amounted to SDR 1.2 billion.22 As the cost to the Fund for providing debt relief to these countries was not included in the original costing estimates for the HIPC Initiative, additional financing would need to be secured when these members are ready to clear their arrears and embark on the HIPC Initiative and possible “beyond-HIPC” debt relief. 23,24,25 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. Zimbabwe is currently neither PRGT-eligible nor included in the list of “ring-fenced” countries that could benefit from the HIPC Initiative.

Appendix Table 1.

Summary of Bilateral Commitments to the PRGF-ESF and PRG-HIPC Trusts 1/

(In millions of SDRs; end-June 2014)

article image
article image
article image

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 2.

PRGT—Borrowing Agreements

(In millions of SDRs; end-June 2014)

article image

Including additional loan commitments for interim PRGF operations.

Committed to the General Loan Account of the PRGT.

Committed to the ECF Loan Account of the PRGT.

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

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

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

On October 1, 1999, the Export-Import Bank of Japan merged with the Overseas Economic Cooperation Fund and became the Japan Bank for International Cooperation.

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

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

The original loan commitment of the Bank of Spain was SDR 220 million; however, only SDR 216.4 million was drawn and disbursed by the expiration date for drawings.

The full loan commitment of SDR 200 million was drawn in January 1989; this amount was fully disbursed to borrowers by 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 3.

PRGT—Subsidy Agreements 1/

(In millions of SDRs; end-June 2014)

article image

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 2.0 percent per annum. If the interest rate obtained was less than 2.0 per annum, the deposit bore zero interest. The investment was extended in 2004 for another 10 years to benefit HIPC Trust.

This is a temporary deposit agreement to mature on October 31, 2014 or earlier at the time of the conclusion of a new investment agreement. The investment income of up to 2 percent related to the new temporary 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.

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 instalments 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 8.

PRG-HIPC Trust—Bilateral Deposit/Investment Agreements

(In SDRs; as of end-August 2014)

article image
Source: Finance Department.

Some agreements specify the maturity date, while some state a term; a “10 years” term indicates that the deposit is due in 10 years from the effective date of the agreement.

Original interest rate was 2% per annum; in August 2004, the rate was amended to 1% per annum, but could have been reverted to 2% per annum if the return on investment reached 3% per annum.

The agreement amount was Euro 300 million.

2% per annum of the net investment earnings (or any lesser amount if the returns on investments was below 2%) was to be transferred to the PRGF-HIPC Trust and the remainder to the depositor. Upon maturity of the deposit in June 2014, the Indonesian authorities agreed to put the SDR 25 million principal in a temporary deposit, pending an agreement to reinvest it to benefit the PRGT.

Five annual installments, each equivalent to SDR 1 million, of 10 year maturity.

Two installments (received in June 1998 and August 1999) with maturity date of 10 years each. Original interest rate of 2% per annum was amended in June 2004 to 0.5% per annum, with an option to be reverted to 2% per annum if the return on investment reached 2% per annum.

This investment consisted of 14 installments, each of 10 year maturity, with the first one received on March 27, 2001 and the last one on September 27, 2004. The installments originated from repayments of the outstanding amounts of loans made by the SFD to PRGF borrowers and the date of each installment corresponded to the date of repayment of the associated loans. Upon maturity, each subsequent installment has been reinvested to benefit PRGT.

Four annual installments of SDR 10 millions each (received in November 1998, August 1999, August 2000, and August 2001, respectively) and 10 year maturity. Original interest rate of 2% per annum was amended in August 2004 to 0.5% per annum, with an option to revert to 2% per annum if the return on investment reached 2% per annum.

Maturity of 19 years or at the end of life of the Trust, whichever is earlier.

Interest rate obtained by the Trust minus 2.6% per annum; if the interest rate was 2.6% per annum or less, no interest was paid to the depositor.
1

This paper was prepared by a team led by Chris Geiregat, and comprising Ivetta Hakobyan, María Méndez, Henry Mooney, and Izabela Rutkowska.

2

The “self-sustained” PRGT relies solely on resources in the Trust to generate the required funds to subsidize commitments, while loans continue to be provided by members.

4

Additional background information and details of the financing package were provided in Financing the Fund ’s Concessional Lending to Low-Income Countries—Further Considerations (6/26/09).

6

See Update on the Financing of the Fund ’s Co ncessional Assistance and Proposed Amendments to the PRGT Instrument (4/07/2014) for a full discussion and description of the measures and amendments to the PRGT approved by the Executive Board in April 2014.

8

Absent the waiver, the applicable interest rate for 2013 and 2014 would have been zero percent for all ECF and RCF loans, and 0.25 percent for SCF loans and outstanding balances under the ESF.

9

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 would repay 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 outstanding loans from participating contributors.

10

See Decision No. 14593-(10/41), adopted 4/21/10.

11

Participants of the encashment regime are: China, France, Italy, Japan, Korea, Saudi Arabia, and the United Kingdom.

12

In all these cases, the Fund, at its sole discretion, can extend the maturities for additional periods up to the maturity dates for the corresponding loan disbursements under the facility of the PRGT.

13

Borrowing agreements that provide resources in SDRs are with the following creditors: the Bank of Spain, Banque de France, the People’s Bank of China, the Bank of Korea, the Government of Japan, the Government of the United Kingdom, the Bank of Italy, and the Saudi Arabian Monetary Agency.

14

The PRGT Instrument provides that resources of the SLAs will be drawn first for disbursements under the respective facilities, and resources in the GLA will be used for a facility only when resources in the relevant SLA are exhausted. In addition, staff will manage disbursements under borrowing agreements of contributors participating in the encashment regime in a manner that preserves a sufficient liquidity buffer for the encashment regime to be operational.

15

The SLA for the RCF was fully depleted in April 2012; balances in the SLA for SCF stood at SDR 66 million at end-June 2014, significantly below existing SCF commitments.

16

The PRG-HIPC Trust was established in 1997 with a dual purpose: (a) to provide assistance to LICs by making grants and/or loans for purposes of reducing their external debt burden to sustainable levels, and (b) to subsidize the interest rate on interim ECF operations to PRGT-eligible members.

18

On July 21, 2010, the Executive Board decided to provide SDR 178 million in PCDR-financed debt stock relief to Haiti, eliminating Haiti’s entire outstanding debt to the Fund (http://www.imf.org/external/np/exr/facts/pcdr.htm).

19

Cost estimates at end-June 2014 include Chad and Eritrea, but exclude Somalia and Sudan. Nepal, which was confirmed as HIPC-eligible at the November 2011 ring-fencing exercise but has decided not to avail itself of debt relief under the HIPC Initiative, is excluded from this cost estimate.

20

See DEC/13588-(05/99) MDRI, November 23, 2005, effective January 5, 2006, as amended by DEC/14649-(10/64), June 25, 2010.

21

This account, which became effective on March 14, 2008, was an interim vehicle to temporarily hold the refunds of the distribution of a portion of the SCA-1 balances and the deferred charges adjustment in the context of the Fund’s debt relief for Liberia, pending instructions from members as to the disposition of the resources.

22

Following the secession of South Sudan from Sudan on July 9, 2011, all the overdue obligations to the Fund remain a liability of Sudan, which is the continuing state.

23

In the context of the MDRI in 2005, the G-8 committed that donors would provide the resources required for full debt relief at the completion point for the three protracted arrears cases (Liberia, Somalia, and Sudan).

24

Neither Somalia, nor Sudan, is eligible for debt relief under the MDRI, as there would be no MDRI-eligible debt following the clearance of their arrears. It is possible, however, that they could be considered for “beyond HIPC” debt relief, as was done in the case of Liberia.

25

Sudan and South Sudan reached the so-called “zero option” agreement in September 2012, whereby Sudan would retain all external liabilities after the secession of South Sudan, provided that the international community gave firm commitments to the delivery of debt relief within two years. Absent such a commitment, Sudan’s external debt would be apportioned with South Sudan based on a formula to be determined. Recently, the two parties have agreed to extend this agreement, which expired in September 2014.

Same Series

Other IMF Content

Other Publishers

  • Collapse
  • Expand
Cover Policy Papers
Update on the Financing of the Fund's Concessional Assistance and Debt Relief to Low-Income Member Countries
Author:
International Monetary Fund
Volume/Issue:
Volume 2014: Issue 017
Publisher:
International Monetary Fund
ISBN:
9781498342711
ISSN:
2663-3493
Pages:
37
DOI:
https://doi.org/10.5089/9781498342711.007
  • View in gallery

    Concessional Financing Framework

  • Figure 1.
    View in gallery
    Figure 1.

    PRGT Commitments to LICs, 1988–2014

    (In millions of SDRs; as of end-September 2014)

  • Figure 2.
    View in gallery
    Figure 2.

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

    (In millions of SDRs; as of end-August 2014)

  • Figure 3.
    View in gallery
    Figure 3.

    Reserve Coverage Ratio under Different Demand Scenarios, 2015−40

Concessional Financing Framework
Figure 1.

PRGT Commitments to LICs, 1988–2014

(In millions of SDRs; as of end-September 2014)
Figure 2.

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

(In millions of SDRs; as of end-August 2014)
Figure 3.

Reserve Coverage Ratio under Different Demand Scenarios, 2015−40