1. 1 Overview of IDA’s Non- Concessional Borrowing Policy International Development Association Resource Mobilization (FRM) Presentation for MDBs Meeting on Debt Issues July 9, 2008

2. 2 Roadmap I.Why should we be concerned? II.IDA’s Grant Allocation System III.Implementing IDA’s Non-Concessional Borrowing Policy IV.Capacity Building to Manage New Borrowing

3. 3 Debt stocks after successive debt-relief stages

4. 4 But significant challenges remain… l LICs have large investment needs… l LICs have better prospects…  better macroeconomic outlook, lower debt ratios thanks to debt relief  higher investment and higher growth as a result l … but significant vulnerabilities remain  Export concentration  Narrow revenue base  Highly dependent on official financing and affected by large and frequent shocks.

5. 5 Lenders and Borrowers have co-responsibility for maintaining debt sustainability l Borrowers have the first responsibility for outcomes l But their actual capacity is limited  Limited public financial management, public debt management  Highly uncertain economic prospects and limited risk management options  Also important roles for creditors –  Developing mechanisms for information sharing and coordination to help address these risks.  providing results-oriented financing on appropriately concessional terms

6. 6 Roadmap I.Why should we be concerned? II.IDA’s Grant Allocation System III.Implementing IDA’s Non-Concessional Borrowing Policy IV.Capacity Building to Manage New Borrowing

7. 7 IDA’s Grant allocation system l All of IDA’s assistance to IDA-only LICs is on highly concessional terms l The dynamic Low-Income Country Debt Sustainability Framework (DSF) can highlight prospects for future prosperity or vulnerability into current financing decisions, that static debt ratios cannot. l For instance where a country has strong oil prospects, its forward- looking DSA may indicate a low risk, although current debt ratios are high. l On the other hand, in countries historically very vulnerable to shocks, the DSF can serve as an “early warning system”, pinpointing higher risks that cannot be captured with current debt ratios. l IDA’s grant system is linked to DSF outcomes.

8. 8 Evolution of IDA’s traffic light system l IDA’s Grant Allocation System further increases concessionality for countries if DSF debt distress risks are moderate or high: l A country’s risk of debt distress is translated into a “traffic light” which determines mix of highly concessional credits and grants. IDA traffic lights FY06-FY08

9. 9 Roadmap I.Risks and Opportunities II.IDA’s Grant Allocation System III.IDA’s Non-Concessional Borrowing Policy IV.Capacity Building to Manage New Borrowing

10. 10 IDA’s Non-Concessional Borrowing Policy (NCBP) l Framework for IDA’s response to non-concessional borrowing risks in grant-eligible countries and post-MDRI countries - approved by IDA’s Board in July 2006. l Primary objective to address risk that non-concessional lending can lead to a rapid re-accumulation of debt and undermine debt sustainability (and undermine efforts of IDA and other creditors). l Not a blanket restriction on borrowing, anticipating cases where non- concessional borrowing may be part of a financing mix that helps promote economic growth, particularly where concessional financing is limited. l Two key pillars to the policy: l First: Broadening the use of the DSF among creditors and borrowers. l Second: Discouraging non-concessional borrowing through borrower disincentives, and tools to manage their debt.

11. 11 Creditor Outreach and the DSF l Increased accessibility of the DSF: l DSAs regularly published on IDA and IMF websites, along with explicit guidance on concessionality policies, concessionality calculators, mailboxes for Q&As: (lendingToLICs@worldbank.org; lendingToLICS@IMF.org)lendingToLICs@worldbank.org; lendingToLICS@IMF.org l Ongoing consultations around the DSF: l Discussions on the LIC DSF framework have taken place with nearly all major multilateral and bilateral creditors to LICs. Increased use of the DSF: l Other multilateral creditors have incorporated DSF risk ratings in their financing decisions: AfDB, AsDB, EBRD, EIB, IADB, IFAD l OECD ECA members agreed in January to a set of Sustainable Lending Guidelines, linked to the DSF and Bank and IMF concessionality levels

12. 12 NCBP definition of concessionality l The NCBP sets out clear definitions of concessionality, and a list of countries to which the policy applies. l IDA’s concessionality requirements mirror those of the IMF, but apply whether or not the country has a current IMF-supported arrangement. l Concessionality requirement is 35% grant element, or more, in cases that a higher grant element is required under an existing IMF arrangement. l Definition uses CIRR discount rates, and margins linked to the length of loan maturity. l A hands-on calculator is provided on the IDA website at http://siteresources.worldbank.org/IDA/Resources/GrantElement Calculator.htm. http://siteresources.worldbank.org/IDA/Resources/GrantElement Calculator.htm l Definition applies on a loan-by-loan basis, but concessionality can be assessed for integrateged financing packages – using definition consistent with that of IMF.

13. 13 Borrower-level disincentive measures l For countries that borrow non-concessionally, IDA has identified a set of criteria on which borrowing is assessed case-by-case to determine whether to grant an exception to the policy. l IDA looks at both country-specific and loan-specific factors in determining whether to grant an exception (box 3 of NCBP paper) l Where non-zero limits approved under IMF arrangements, the specific borrowing and returns to borrowing under these limits has usually been assessed together with Bank staff. l If the borrowing is considered detrimental to debt sustainability, IDA response to borrowing made on case-by-case:  Can be a volume response, in cases where IDA is providing grants, and hence debt sustainability is key concern.  Can be a terms response, in cases where the country has significant access to market financing.

14. 14 Update on Implementation l Implementation of the second prong of the policy has proceeded as set out in the 2006 NCBP paper, but acutal cases have been few. l Cases assessed to date include Angola, Mali, Ghana, and Rwanda – details in Board paper. l In cases of Angola and Ghana – terms of IDA assistance hardened. l Mali was granted an exception, Rwanda was granted a preliminary exception on the basis of planned borrowing. l Cases illustrate limitations of policy, in particular where IDA financing is small relative to other sources of financing. l Points to importance of information flows in being able to assess impact of the non-concessional borrowing – where insufficient information, case for exception cannot be made.

15. 15 Update on Implementation (2) l Cases are reported to the Board individually when a response is proposed (Mali and Angola), and other cases are reported in a regular report. l Update on NCBP was provided in October 2007, during IDA15 replenishment discussions (see replenishment website IDA role in DS paper). l Latest update paper (June 2008) has more detail – not yet publicly disclosed. l Update provided additional clarifications on:  Integrated financing packages  Upstream preliminary decisions on Bank response.  Definition of public enterprise.

16. 16 Roadmap I.Risks and Opportunities? II.IDA’s Grant Allocation System III.IDA’s Non-Concessional Borrowing Policy IV.Capacity Building to Manage New Borrowing

17. 17 Capacity Building in LICs to Manage New Borrowing l Also an integral part of the NCBP. l Capacity building for improving debt management and medium term debt management strategies is a key factor in improving debt sustainability prospects in LICS. l Bank’s efforts being ramped up in three dimensions: l First, debt sustainability analysis training workshops have reached about 40 LICs. l Second, a Debt Management Performance Assessment Tool (DeMPA) has been piloted and will be applied in 60 LICs over the next 3 years. l Third, medium term debt management strategies being developed with Bank-Fund technical assistance. l Joint work of IDA and the IMF in this area will complement ongoing outreach to creditors and help reinforce sustainable lending practices.

18. 18 Thank You adeplaa@worldbank.org Further information on the NCBP, and a list of countries to which the policy applies can be found at: www.worldbank.org/IDAwww.worldbank.org/IDA under “debt sustainability and grants”