Transcript Research agenda on exogenous shocks

Debt Relief, Grants and Free Riding:
IDA’s proposed response
Multilateral Development Bank Meeting on
Debt Issues
Washington, DC, June 21-22, 2006
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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.
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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
IDA
Grants and debt relief
Other creditors
Non-concessional lending
Lower risk of debt distress
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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).
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The Impact of the MDRI
MDRI brings debt ratios for eligible countries (at least
initially) down to levels below those of many MiddleIncome 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.
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Debt Burden Indicators-Post MDRI
400
350
NPV of debt-to-Exports
300
Peru
250
Syria
Ecuador
200
Brazil
Jordan
150
Bolivia
100
Guatemala
Nicaragua
Philippines
Mauritania
Honduras
Guyana
50
China
Thailand
0
0
10
20
30
40
50
NPV of debt-to-GDP
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60
70
18 CP HIPCs
80
90
100
Lower Middle Income Countries
Preliminary Risk Ratings post-MDRI
Ghana Senegal Tanzania Mali Uganda
Benin Mozambique Zambia Madagascar
Burkina Faso Ethiopia Guyana
Nicaragua
Rwanda Niger
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Impact of Non-concessional borrowing
Figure 2: NPV of debt-to-exports ratio - Nonconcessional vs. concessional borrowing 2006-15
300
4.0
4.0
Plus 3% of GDP concessional terms
3.0
250
200
Figure 3: Change in resource flows - Nonconcessional vs. concessional borrowing 2006-15
Plus 3% of GDP - nonconcessional terms
Plus 3% of GDP concessional terms
150
2.0
2.0
1.0
1.0
0.0
0.0
100
2005
-1.0
50
Baseline (after MDRI relief)
-2.0
0
2005
2015
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3.0
2025 -3.0
2015
2025
-1.0
Plus 3% of GDP non-concessional
terms
-2.0
-3.0
Key building blocks to an approach to free riding
1.
2.
3.
4.
Agreement on a concessionality benchmark
Creditor coordination
Advanced reporting, increased monitoring.
Disincentives aimed at borrower level
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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.
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Country
Albania
Armenia
Bangladesh
Benin
Burkina Faso
Burundi
Cameroon
Chad
Congo, Republic of
Dominica
Georgia
Ghana
Grenada
Guyana
Honduras
Kenya
Kyrgyz Republic
Malawi
Mali
Moldova
Mozambique
Nepal
Nicaragua
Niger
Rwanda
Sao Tomé & Príncipe
Sierra Leone
Tanzania
Zambia
Date approved
Expiration date
Concessionality requirement
1/27/2006
5/25/2005
6/20/2003
8/5/2005
6/11/2003
1/23/2004
10/24/2005
2/16/2005
12/6/2004
12/29/2003
6/4/2004
5/9/2003
4/17/2006
9/20/2002
2/27/2004
11/21/2003
3/15/2005
8/5/2005
6/23/2004
5/5/2006
7/6/2004
11/19/2003
12/13/2002
1/31/2005
8/12/2002
8/1/2005
5/10/2006
8/16/2003
6/16/2004
1/26/2009
5/24/2008
12/31/2006
8/4/2008
9/30/2006
1/22/2007
10/23/2008
2/15/2008
12/5/2007
12/28/2006
6/3/2007
10/31/2006
4/16/2009
9/12/2006
2/26/2007
11/20/2006
3/14/2008
8/4/2008
6/22/2007
5/4/2009
7/5/2007
11/18/2006
12/12/2006
1/30/2008
6/11/2006
7/31/2008
5/9/2009
8/15/2006
6/15/2007
35
35
35
35
35
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35 (short-term), 50 (medium- and long-term debt)
35
35
50
35
35
35
35
n.a.
35
35
45
35
35
35
35
35
35
50
50
50
35
35
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 nonOECD and commercial creditors.
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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.
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Countries subject to IDA free-riding policy
"Red Light" Countries 2/
Afghanistan
Guinea
Bhutan
Guinea-Bissau
Burundi
Haiti
Cambodia
Kyrgyz Republic
Central African Republic
Lao People's Democratic Republic
Chad
Liberia
Comoros
Nepal
Congo, Democratic Republic of Niger (MDRI)
Congo, Republic of
Rwanda (MDRI)
Cote d'Ivoire
Sao Tome and Principe
Djibouti
Sierra Leone
Eritrea
Solomon Islands
Gambia, The
Tonga
"Yellow Light"
Post-MDRI
Countries
"Green Light" Countries
Angola
Benin
Ethiopia (MDRI)
Burkina Faso
Guyana (MDRI)
Cameroon
Lesotho
Ghana
Malawi
Madagascar
Mongolia
Mali
Nicaragua (MDRI)
Mauritania
Samoa
Mozambique
Tajikistan
Senegal
Tanzania
Uganda
Zambia
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.
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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 nonconcessional 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 nonconcessional borrowing.
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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 freerider 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
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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.
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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.
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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)
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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 nonconcessional borrowing and adherence to
reporting requirements need to continue.
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End
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