Debt Sustainability and GrantsConsultation on the 7th replenishment of IFAD’s resources
July 2005 - Third session of the Consultation on the 7th replenishment of IFAD’s resources
Context: imperatives in development assistance today
• increase levels of ODA to reach MDGs• contain the debt burden of poor
countries at sustainable levels• harmonize development assistance in
substance and form
July 2005 - Third session of the Consultation on the 7th replenishment of IFAD’s resources
Poorest country debt reduction: role of MDBs
• large percentage of poorest country debt is held by multilateral institutions
• limited applicability of Paris Club procedures
• comprehensive debt relief necessitates participation of MDBs
• Multilateral engagement in poorest country debt relief - HIPCDI (1996) and enhanced HIPCDI (1999)
July 2005 - Third session of the Consultation on the 7th replenishment of IFAD’s resources
Scope and extent of HIPCDI
• 38 countries potentially eligible• 27 have reached Decision Point• Total value of relief - about US$ 58
billion in 2004 NPV terms
July 2005 - Third session of the Consultation on the 7th replenishment of IFAD’s resources
IFAD in HIPCDI
• IFAD Governing Council approved full participation in February 1997
• nominal value of IFAD relief – approximately USD 620 million (over 40 years)
July 2005 - Third session of the Consultation on the 7th replenishment of IFAD’s resources
Accelerating relief and debt sustainability
• recognition of poor progress towards achieving MDGs in many poorest countries - especially in Africa
• increased appreciation of linkages between poverty and global insecurity
• push towards increased ODA flows • going beyond HIPC - from debt relief to
debt avoidance
July 2005 - Third session of the Consultation on the 7th replenishment of IFAD’s resources
The dilemma of the MDBs
• Irreconcilable imperatives:– increase assistance (in context of
traditional emphasis upon loan instruments) to poor countries
– avoid increasing debt burden of poor countries beyond sustainable levels
– avoid undermining the long-term financial sustainability of the MDBs themselves
July 2005 - Third session of the Consultation on the 7th replenishment of IFAD’s resources
Opening a way forward: the “package” of three elements
• major expansion of the grant element in new assistance to poor countries with debt sustainability problems: avoid expansion of indebtedness beyond sustainable levels
• expansion of committable resources of MDBs (strong replenishments): increase in immediate support
• replenishment commitment to compensation to MDBs for repayments forgone: maintain sustainability of MDBs
July 2005 - Third session of the Consultation on the 7th replenishment of IFAD’s resources
Two-pronged approach to debt sustainability
Asian Development Fund, African Development Fund and IDA now have two dimensions of debt management support:
• HIPC reduces level of payments from poor countries on existing debt
• DSF avoids new assumption of debt obligations (by replacing them with grants) taking debt burden above sustainable level
• HIPC and DSF will run side by side: one applies ex post; the other ex ante
July 2005 - Third session of the Consultation on the 7th replenishment of IFAD’s resources
Criteria of eligibility for grant-based assistance under DSF
In African Development Fund and IDA, debt sustainability is defined in both financial and institutional terms, combining:
• 3 debt finance indicators (ratio of debt to GDP and exports; ratio of debt service to exports)
• Strength of policy and institutional framework (CPIA scores provide indicator)
Countries classified as high, medium or low debt vulnerable on basis of these variables
July 2005 - Third session of the Consultation on the 7th replenishment of IFAD’s resources
Results of application of the DSF
In IDA, for example:• 40 Highly debt vulnerable countries will
receive 100% of all assistance in grants• 5 Medium debt vulnerable countries will
receive 45% of assistance in grants• the remaining low debt vulnerable
countries will receive no grants• grants to rise to estimated 30% of all IDA
assistance• all grants to countries to be based only on
debt vulnerability assessment within Debt Sustainability Framework (DSF)
July 2005 - Third session of the Consultation on the 7th replenishment of IFAD’s resources
Performance-based allocation systems and the DSF
• PBAS determines volume of assistance• DSF determines what proportion of the
country PBAS allocation is available in loans and in grants
• “disincentive” effect of grants to poor CPIA scorers balanced by Modified Volume Approach (MVA):– high and medium debt vulnerable countries
get about 90% of PBAS allocations– low debt vulnerable countries to get about
110% of PBAS allocation
July 2005 - Third session of the Consultation on the 7th replenishment of IFAD’s resources
Overcoming the impact of grants on the MDBs’ development assistance capacity
• IDA will lose reflows from about 30% of assistance, involving more than half of the un-blended IDA recipients. AfDF will lose even more (>40%)
• 9% of PBAS allocations of grant receiving countries will be put aside for management to compensate for service charges forgone
• replenishment members commit to compensating IDA and AfDF for principal payments forgone - when forgone (pay-as-you-go formulation) An operational cost item additional to core replenishment commitments
July 2005 - Third session of the Consultation on the 7th replenishment of IFAD’s resources
Benefits and responsibilities of the 3-piece package
• poor debt vulnerable countries get increased access to resources (expanded replenishment) with no debt repayment obligations (DSF)
• non-debt vulnerable countries get expanded PBAS allocations (expanded replenishment) plus about 10% (DSF)
• MDBs expand grant component of assistance on a no-win, no-lose basis
• MDB replenishment members commit themselves to cover future cost of expanded grant programme as a separate and additional financing item
July 2005 - Third session of the Consultation on the 7th replenishment of IFAD’s resources
Building a debt sustainability system
• objective is to construct a debt management system for debt vulnerable poor countries and for all their financiers
• desired outcome - a uniform approach to country ODA by all financiers. Hence IDA and AfDF DSFs are virtually identical from the beginning
• forthcoming IDA-IMF guidelines will very probably make access to grants conditional on containing borrowing from other sources
July 2005 - Third session of the Consultation on the 7th replenishment of IFAD’s resources
Implications of a debt sustainability system for IFAD
• in 40 IDA countries, IFAD may rapidly be under pressure to provide assistance only within new common approach
• inability to participate in DSF may lead to narrowing or closure of opportunities for IFAD to provide poverty reduction assistance in many of the poorest countries
July 2005 - Third session of the Consultation on the 7th replenishment of IFAD’s resources
Adoption of DSF methodology and IFAD assistance
• about 30 percent of highly concessional lending shifts from loan to grant terms
• assistance shifts to grant terms in: – West & C Africa 18 countries– Asia and Pacific 11 countries– East & S Africa 11 countries– Latin America & C 3 countries– Middle East and NA 3 countries
• if committable resources do not expand, the volume of assistance to the most debt vulnerable countries declines (action of MVA)
July 2005 - Third session of the Consultation on the 7th replenishment of IFAD’s resources
What adoption of DSF would mean for IFAD’s finances
• If the IDA and AfDF grant and compensation sub-package is adopted the financial implications for IFAD would be zero, i.e.:– setting aside of 9 per cent of PBAS
allocation of grant recipients covers loss of service charge*
– replenishment commitment to “pay-as-you-go” formula replaces principal payments implicitly forgone
*Subject to IFAD-specific re-calculation
July 2005 - Third session of the Consultation on the 7th replenishment of IFAD’s resources
Implications without the compensation element of the IDA package
• short-term impact on IFAD would be low (because highly concessional loans have 10 year grace period)
• in medium-to-long term IFAD’s commitment capacity would be seriously and quite rapidly depleted – necessitating curtailment of the overall programme of work
July 2005 - Third session of the Consultation on the 7th replenishment of IFAD’s resources
Conclusions
• IFAD adoption of DSF would be beneficial if whole three-element IDA package is adopted– short term financial benefits of DSF
alone for vulnerable countries are negative
– system only gives MDG boost when linked to higher replenishment
• adoption of DSF without the compensation element of the package would lead to major reduction of IFAD commitment capacity to all countries in longer term
July 2005 - Third session of the Consultation on the 7th replenishment of IFAD’s resources
What next?
• 2nd. Consultation requested information paper on DSF for discussion at 3rd Consultation
• 3rd. Consultation considers information paper
• September 2005 Executive Board considers policy paper on fragile states and post-conflict/disaster situations – and review of application of Grant Policy (2003)
• 4th. Consultation considers role and level of grants in IFAD – and appropriate Replenishment recommendations