Multilateral Debt Relief Initiative: Implications for IDA Resource Transfers

1
Multilateral Debt Relief Initiative Implications
for IDA Resource Transfers

• Multilateral Development Bank Meeting on
• Debt Issues
• Washington, DC, June 21-22, 2006

2
Plan of Presentation

• Overview.
• Impact on IDAs Resource Allocations.
• Impact on IDAs Assistance Volumes.
• Impact on IDAs Financing Terms.

3
Overview
4
Key Features of MDRI Relief in IDA

• Modality of Relief Debt forgiveness provided as
  irrevocable cancellation of payment obligations
  (principal and charges) under eligible credits.
• Financing IDAs costs under MDRI to be covered
  through replenishment of IDAs resources.
• Contribution baseline introduced to establish
  additionality of donor financing.
• Key Dates of Debt Relief
• Cutoff date December 31, 2003.
• Implementation date July 1, 2006.

5
Credit and Country Coverage

• Credit coverage stock of eligible debt based on
  debt outstanding and disbursed (DOD), as of
  cutoff date.
• Countries expected to become eligible
• HIPC countries once they reach completion point.
• Total cost estimate for IDA about SDR 25 billion
  (USD 37 billion).

6
Impact on IDAs Resource Allocations
7
MDRI and IDA Resource Allocations

• MDRI will affect IDA resource allocations through
  two avenues
• Its impact on IDA assistance volumes.
• Its impact on IDA financing terms.
• Both issues will be briefly dealt with in this
  presentation.

8
Impact on IDAs Assistance Volumes
9
Impact on IDA Allocations

• Net Allocations affected by
• Netting-out of forgone reflows from gross
  allocations for MDRI recipients.
• Reallocation of compensatory donor resources
  across all IDA-only countries.
• Debt relief would thus have an impact on
• IDAs total assistance flows (new IDA commitments
  plus debt service forgiven) and
• IDAs operational and financial presence in
  eligible countries, as measured by new IDA
  commitments.

10
The Netting Out Mechanism

• Netting out mechanism of the MDRI
• New IDA commitments Gross PBA-Based
  Allocations Debt Service Forgiven Share in
  Compensatory Resources
• Outcome depends on which countries will benefit
  from such reallocation.
• Reallocation will be limited to IDA-only
  countries (excluding gap ones).

11
Projecting Future IDA Commitments

• Debt service relief numbers largely a known
  quantity.
• But future gross PBA allocations are much less
  so. They depend on
• Size of IDA envelope
• Relative country performance
• Grant eligibility status
• Possible graduations

12
Simulated Outcomes for 18Post-Completion Point
HIPCs

• Upper panel
• Flat IDA envelope and flat gross allocations.
• Composition, but not total volume, of IDA
  assistance flows changes.
• Lower panel
• IDA envelope and gross allocations grow by 2
  per annum.
• Consistent with agreed donor contribution
  baseline.

13
Key Outcomes

• No MDRI recipient worse-off in terms of total IDA
  assistance flows.
• Composition of total IDA assistance would change.
• Part of it would be delivered as debt relief
  rather than fresh money.
• New IDA allocations could decline over time for
  some MDRI recipients.
• Declining trend in new IDA allocations for some
  MDRI recipients would be reversed if graduations
  are factored in.

14
Impact on IDA Financing Terms
15
MDRI and IDA Grants

• Eligibility for MDRI does not automatically
  disqualify countries for access to IDA grants.
• If MDRI-recipients are at moderate or high even
  after debt relief, they would still be eligible
  for 50 percent or 100 percent grants.
• Continued post-MDRI debt-distress risk would need
  to be confirmed by DSAs that take MDRI explicitly
  into account.

16
Post-MDRI Traffic Lights Ethiopia

• After the MDRI, the baseline of the NPV of
  debt-to-exports ratio falls well below the
  threshold (150 percent).
• Moderate risk rating ( yellow light), however,
  driven by stress testing
• Vulnerability to export shocks Most extreme
  stress test leads to substantial breach of the
  threshold.
• The NPV of debt-to-exports ratio in this scenario
  stays above the threshold from 2009 until about
  2016, before slowly declining thereafter.

17
Preliminary FY07 Traffic Lights for MDRI
Countries

• FY07 traffic lights for most MDRI recipients to
  be determined by DSAs.
• Preliminary outcomes
• Red light countries Niger Rwanda.
• Yellow light countries Ethiopia, Guyana
  Nicaragua.
• Green light countries Burkina Faso, Benin,
  Cameroon, Ghana, Madagascar, Mali, Mozambique,
  Senegal, Tanzania, Uganda Zambia.

18
Challenges Ahead

• Ensuring additionality of financing.
• Without it, debt relief would be tantamount to
  changing the composition of external assistance
  leaving overall aid volumes unchanged.
• Realizing the benefits of debt relief.
• Irrevocable debt stock cancellation broadly
  equivalent to 40 years of unconditional budget
  support.
• Need for strong public financial management
  systems.
• Containing post-relief non-concessional
  borrowing.
• Critical to ensure debt sustainability going
  forward.
• Need for a policy on free riding.