financial resource mobilization the world bank debt relief, grants and free riding: idas proposed...

Financial Resource MobilizationThe World Bank

Debt Relief, Grants and Free Riding: Debt Relief, Grants and Free Riding: IDA’s proposed responseIDA’s proposed response

Multilateral Development Bank Meeting onDebt Issues

Washington, DC, June 21-22, 2006


Overview

• IDA grants are linked to a country’s risk of debt distress.

• MDRI debt relief and IDA grants create significant benefits for recipient countries in the form of strengthened debt sustainability prospects and resources for the MDGs.

• However they also potentially add to the risk of “free riding”

• This presentation will discuss the free-rider problem, and building blocks to limit the risk.


What is free riding?• the indirect cross-subsidization, through IDA

grants and debt relief, of other creditors offering non-concessional terms

Higher risk of debt distress

Lower risk of debt distress

IDA

Grants and debt relief Non-concessional lending

Other creditors


What are the Risks?

• Grant-recipient countries with little access to financial markets – risk is limited.

• Higher in resource-rich grant-recipient countries that could rely on non-concessional borrowing collateralized with future export receipts.

• Risks of free riding may be magnified as a result of lower debt ratios resulting from the implementation of the Multilateral Debt Relief Initiative (MDRI).


The Impact of the MDRI

MDRI brings debt ratios for eligible countries (at least initially) down to levels below those of many Middle-Income Countries (see slide 9).

But, static view leads to a risk that countries may accumulate excessive levels of debt that could threaten a return to unsustainability, and weaken IDA without the intended result.

However risk of debt distress post-MDRI varies by country: Forward looking DSF points out continued fragility of most countries. See diagram on slide 10.


Debt Burden Indicators-Post MDRI

HondurasMauritania

Guyana

BoliviaNicaragua

Syria

Guatemala

China

Jordan

Ecuador

Brazil

Peru

Thailand

Philippines

0

50

100

150

200

250

300

350

400

0 10 20 30 40 50 60 70 80 90 100

NPV of debt-to-GDP

NPV

of d

ebt-

to-E

xpor

ts

18 CP HIPCs Lower Middle Income Countries


Preliminary Risk Ratings post-MDRI

Rwanda Niger

Burkina Faso Ethiopia Guyana

Nicaragua

Ghana Senegal Tanzania Mali Uganda

Benin Mozambique Zambia Madagascar


Impact of Non-concessional borrowing

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

2005 2015 2025

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

Figure 3: Change in resource flows - Non-concessional vs. concessional borrowing 2006-15

Plus 3% of GDP - concessional terms

Plus 3% of GDP - non-concessional terms0

50

100

150

200

250

300

2005 2015 2025

Figure 2: NPV of debt-to-exports ratio - Non-concessional vs. concessional borrowing 2006-15

Baseline (after MDRI relief)

Plus 3% of GDP - concessional terms

Plus 3% of GDP - non-concessional terms


Key building blocks to an approach to free riding

1. Agreement on a concessionality benchmark

2. Creditor coordination

3. Advanced reporting, increased monitoring.

4. Disincentives aimed at borrower level


1. Concessionality benchmark for decisions

• Concessional borrowing: multiples ways to measure it.

• DAC ODA definition used for statistical purposes: 25% concessional using 10% discount rate.

• Concessionality benchmark of at least 35% concessional using CIRR discount rates from IMF PRGF programs more realistic.

• 35% is a proven benchmark in IMF programs for borrowing in LICs that does not endanger sustainability

• 35% used by IDA in free-rider context: may be higher/lower if IMF program requires it.


Country Date approved Expiration date Concessionality requirement

Albania 1/27/2006 1/26/2009 35Armenia 5/25/2005 5/24/2008 35Bangladesh 6/20/2003 12/31/2006 35Benin 8/5/2005 8/4/2008 35Burkina Faso 6/11/2003 9/30/2006 35Burundi 1/23/2004 1/22/2007 35 (short-term), 50 (medium- and long-term debt)

Cameroon 10/24/2005 10/23/2008 35Chad 2/16/2005 2/15/2008 35Congo, Republic of 12/6/2004 12/5/2007 50Dominica 12/29/2003 12/28/2006 35Georgia 6/4/2004 6/3/2007 35Ghana 5/9/2003 10/31/2006 35Grenada 4/17/2006 4/16/2009 35Guyana 9/20/2002 9/12/2006 n.a.Honduras 2/27/2004 2/26/2007 35Kenya 11/21/2003 11/20/2006 35Kyrgyz Republic 3/15/2005 3/14/2008 45Malawi 8/5/2005 8/4/2008 35Mali 6/23/2004 6/22/2007 35Moldova 5/5/2006 5/4/2009 35Mozambique 7/6/2004 7/5/2007 35Nepal 11/19/2003 11/18/2006 35Nicaragua 12/13/2002 12/12/2006 35Niger 1/31/2005 1/30/2008 50Rwanda 8/12/2002 6/11/2006 50Sao Tomé & Príncipe 8/1/2005 7/31/2008 50Sierra Leone 5/10/2006 5/9/2009 35Tanzania 8/16/2003 8/15/2006 35Zambia 6/16/2004 6/15/2007 40

Source: IMF presentation ECA Meeting May 2006


2. Creditor coordination

• Free riding is a major issue for IDA donors• Need a concerted international effort to prevent a

repeat of the past• Requires Broadening Creditor Acceptance of the

DSF as useful tool – ideally to underpin an informal arrangement.

• We have presented free-rider issue in number of fora as it has been developed – to MDBs early on in Tunis, to OECD creditors more recently at meetings in Paris.

• Consultations will continue – including with non-OECD and commercial creditors.


Access to Information in DSFs

• Country-specific DSAs are already available on IMF website - by country (www.imf.org)

• About 40 DSF-style DSAs available - 23 joint DSF-style DSAs.

• Every month 2-3 additional DSAs are released.• A stand-alone site should be available in the next

6-8 weeks on World Bank debt website. (www.worldbank.org and type in debt).

• Access to interactive DSF template also to be made more readily available.


Countries subject to IDA free-riding policy

Afghanistan Guinea Angola Benin Bhutan Guinea-Bissau Ethiopia (MDRI) Burkina FasoBurundi Haiti Guyana (MDRI) CameroonCambodia Kyrgyz Republic Lesotho Ghana Central African Republic Lao People's Democratic Republic Malawi MadagascarChad Liberia Mongolia Mali Comoros Nepal Nicaragua (MDRI) MauritaniaCongo, Democratic Republic of Niger (MDRI) Samoa MozambiqueCongo, Republic of Rwanda (MDRI) Tajikistan Senegal Cote d'Ivoire Sao Tome and Principe TanzaniaDjibouti Sierra Leone UgandaEritrea Solomon Islands ZambiaGambia, The Tonga

"Red Light" Countries 2/

1/ This list is subject to change should other countries qualify for IDA grants and/or MDRI. It includes all countries currently elilgible for IDA grants on debt-sustainability grounds, as well as post-MDRI green light countries. It excludes "gap" and "blend" countries which are not eligible for IDA grants.

2/ Inactive countries including Myanmar, Somalia, Sudan and Togo are not listed, but would be subject to the free riding policy upon becoming active.

"Yellow Light" Countries

Post-MDRI "Green Light" Countries


3. Reporting and Monitoring

• Reporting and Monitoring of information flows is a weakness that may hamper a comprehensive approach to free-riding.

• Close sharing of information and monitoring of flows will help to identify and prevent cases of unwarranted non-concessional borrowing.

• Monitoring is difficult – IDA is strengthening adherence to reporting requirements, working with other creditors to enhance reporting.

• IDA requiring advanced reporting of planned new non-concessional borrowing.


4. IDA disincentives at country level

• Ultimately Borrower makes the final borrowing decisions.

• Pragmatic approach to determining whether a non-concessional loan is a “breach” of the free-rider policy.– accept that some potentially high return

projects may warrant special exceptions– Some additional flexibility for post-MDRI

countries with low risk of debt distress– Emphasizes importance of debt

management


Available instruments in IDA

• For unwarranted breaches options available:– a reduction in volumes,– changing IDA financing terms

However, there is a tradeoff:• volume cuts reduce resources that could be

used to reach the MDGs• hardening of terms may exacerbate debt

sustainability problems.


Disincentives

Grant-eligible countries:• Volume cuts would primarily be used in countries in

which debt sustainability is a major concern• Initial 20% cut to grant allocations removes “subsidy”,

but can be escalated for more serious or prolonged breaches.

• lf disincentives are ineffective, a strong undertaking would be sought from borrower to abide by an agreed borrowing strategy.

• Last resort measure: Management could consider disengaging from future support to the country.


Risks to IDA incentive approach

• Approach limited effectiveness if:– Countries can compensate through

additional non-concessional borrowing (risk higher for post-MDRI)

– Disincentives lead to a delay or reluctance to report, which has been particularly problematic outside of Fund arrangements.

– Size of available non-concessional borrowing dwarfs IDA allocations (no leverage)


Conclusion

• No magic bullet to free rider problem• Requires concerted international effort by all

actors.• Efforts to enhance creditor coordination will

continue.• Ongoing efforts to improve debt management

capacity should help.• Efforts to improve information on non-

concessional borrowing and adherence to reporting requirements need to continue.


End

financial resource mobilization the world bank debt relief, grants and free riding: idas proposed...

Documents

world bank debt relief

world bank debt website

world bank access

world bank source

world bank countries

world bank overview

diagram slide

ida freeriding policy