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 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 Debt stocks after successive debt-relief stages

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 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 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 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 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 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 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 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 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: 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 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 Calculator.htm. 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 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 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 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 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 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 Thank You Further information on the NCBP, and a list of countries to which the policy applies can be found at: under “debt sustainability and grants”