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Multilateral Debt Relief and
Concessional Finance Reform at
the IDB
2007 MDB Meeting on Debt Issues
Washington DC, July 11-12, 2007
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The IDB Debt Relief
• 100% debt relief of FSO OLB as of 12/31/04
for BO, GY, HA, HO, and NI – Effective
January 2007
• Future program to FSO countries provided
through FSO/OC blend loans
• Haiti to receive grants through 2009, and a
mix of grants and FSO loans thereafter
• No Financing Gap: FSO resources only - no
additional internal or external resources
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IDB Debt Relief – how much?
(In US$ millions)
Country
Bolivia
Guyana
Haiti
Honduras
Nicaragua
Total
Principal Interest
736
307
354
113
423
102
1,070
297
786
198
3,370
1,017
Total
1,044
467
525
1,367
984
4,387
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Impact of debt relief has been significant…
Net Present Value (NPV) of External Public Debt
(% of GDP)
140%
73%
120%
100%
80%
60%
40%
20%
0%
Bolivia
Guyana^
2003
2006(*)
Haiti
Source: IMF, IDB.
Nicaragua
After IDB 07-Relief
*IMF estimates for 2006 include HIPC and MDRI relief
^ Guyana data as of end of 2002
Honduras
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…and has improved debt burden indicators
Countries
NPV External
Debt/GDP (%)
NPV External
Debt/Exports (%)
Before*
After**
Before*
After**
Bolivia
35
18
173
51
Guyana^
122
38
84
48
Haiti
31
12
231
107
Honduras
53
14
92
33
Nicaragua
139
35
431
88
*Status as of 2003 **Status after IDB relief
^ Guyana data as of end 2002
Source: IMF, IDB, WB.
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IDB has given meaningful debt reduction…
NPV of Outstanding Debt with the IDB
(% of GDP)
40%
35%
30%
25%
20%
15%
10%
5%
0%
Bolivia
Guyana
Before Relief
Haiti**
After IDB HIPC*
Honduras
Nicaragua
After IDB 07-Relief
(*) after remaining HIPC relief
(**) IDB HIPC includes interim relief. MDRI relief assumes completion point in 2009.
Source: IDB.
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…providing fiscal space for higher
expenditure to achieve MDGs
IDB Interest Payment Relief
IDB Interest Payment Relief
(as a % of poverty reducing expenditure*)
(yearly averages, in US$ millions)
5%
4%
BOLIVIA
18.2
GUYANA
6.8
HAITI
4.7
HONDURAS
18.3
NICARAGUA
18.5
3%
2%
1%
0%
Bolivia
Guyana
Haiti (**)
Honduras
Nicaragua
*IDB interest payment relief is defined as the difference between annual interest payments due before and after IDB relief
(average 2007-2012); (**) Estimations based on social expenditure in 2005-2006 budget.
Note: Poverty Reducing Expenditure as % of GDP (2006): BO 12.4%, GY 20.1%, HO 9.2%, NIC 13.2%.
Source: IMF/IDA (HIPC Statistical Update), IDB.
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Key issues moving forward
• Provide resources for poverty reduction and
achieving MDGs
• Ensure that benefits of debt relief are sustainable
• Devise a framework to mitigate incentives for
“free riding”, moral hazard and rapid post-relief
debt accumulation
• Improve system for allocating resources consistent
with debt sustainability and country performance
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DSF as a tool for IDB lending policies
•
Use the DSF approach for IDB lending
•
Strengthen the allocation of resources based on country
performance and risk of debt distress
•
Determine concessionality and indicative net flows
consistent with country strategies
•
Coordinate with countries and other financial institutions
regarding sustainable debt policies
•
Determine Bank’s indicative lending envelope in country
strategies
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Lending Strategy Matrix
POLICIES AND
INSTITUTIONS
STRONG
MEDIUM
WEAK
LOW
High Lending
Low Concessionality
Medium Lending
Low Concessionality
Low Lending
Low Concessionality
MEDIUM
High Lending
Medium Concessionality
Medium Lending
Medium Concessionality
Low Lending
Medium Concessionality
HIGH
High Lending
High Concessionality
Medium Lending
Highly Concessionality
Low Lending
High Concessionality
RISK
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Parallel structure and concessionality
levels
RISK OF DEBT
DISTRESS
PARALLEL STRUCTURE
CONCESSIONALITY*
FSO
OC
LOW RISK
20%
30%
40%
80%
70%
60%
30%
37%
45%
MEDIUM RISK
50%
60%
70%
50%
40%
30%
53%
60%
68%
HIGH RISK
80%
90%
100%
20%
10%
0%
75%
83%
90%
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Source: Concessionality calculated according to IMF methodology and discount rate (7.18%)
Guidelines for lending strategies
PARALLEL
STRUCTURE
FSO | OC
QUALITY OF
POLICY AND
INSTITUTIONS
RISK OF DEBT
DISTRESS
BOLIVIA
Medium
Low
30%
70%
37%
GUYANA
Medium
Medium
50%
50%
53%
Weak
High
100%^
HONDURAS
Strong
Low
30%
70%
37%
NICARAGUA
Medium
Medium
50%
50%
53%
HAITI
CONCESSIONALITY*
100% (grants)
*Concessionality calculated according to IMF methodology and discount rate (7,18%)
^ assumes grants until 2009
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Enhanced Performance Based Allocation
(PBA) system
• The new enhanced system for allocation of FSO
resources addresses two issues:
– Strengthening the link between performance and allocation of
concessional resources
– Ensuring consistency with debt sustainability framework
• Previous system considered: needs (40%) and
performance (60%)
• The new system enhances the performance factor and:
– provides access to higher levels of lending based on stronger
performance and lower risk
– deals with some weaknesses of the previous mechanism
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Features of the new system
• Provides access to higher levels of lending based on risk
and performance criteria
• Benefits countries able to leverage more OC resources
based on the DSF approach
• Sets the incentives to reduce debt risks and strengthen
performance to access more resources
• Allows the Bank to increase the size of the overall lending
program
• However, in the short run may affect countries with
higher risk of debt distress. Therefore, a transition
mechanism is proposed for 2007-2008
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Transition system 2007-2008
Component I : allocation based on previous system.
Applied to a proportion of the total resources of the parallel
structure
Component II: allocation of FSO based on exponential
formula described
Total Allocation: consistent with debt sustainability
TRANSITION SYSTEM 2007-2008
Component I (50% of FSO)
Population
GNIpc
Portfolio
Component II (50% of FSO)
CIPE
Population
Linear Formula
GNIpc
Performance*
Exponential Formula
Weight
Weight
Weight
Weight
Weight
Weight
Weight
22%
18%
18%
42%
.5
-1
2
Performance is a weighted average of portfolio performance (30% ) and CIPE (70%).
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Thank You
Multilateral Debt Relief and Concessional
Finance Reform at the IDB
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