The IMFs Policy on Concessionality

1
The IMFs Policy on Concessionality

• MDB Meeting on Debt Issues
• July 9, 2008

2
Overview

• Rationale and Modalities
• Implementation
• Conclusions

3
Debt Limits

• The Fund introduced external debt limits in 1979
  for all upper-credit-tranche arrangements (access
  above 25 percent of quota)
• Debt limits were introduced to
• Prevent the build-up of external debt during the
  period of the Fund arrangement to levels that may
  lead to debt-servicing problems in the medium
  term
• Ensure that restraint on domestic demand is not
  threatened by unanticipated recourse to external
  financing
• Limit a member's external vulnerability
• The limits apply to public and publicly
  guaranteed debt excluding concessional loans
• Concessional debt is excluded to help balance the
  need for adequate financial support with the need
  to control future debt-service burdens

4
Concessionality

• The definition of concessionality used by the
  Fund is closely aligned to that used by other
  institutions for the same purpose (for example
  OECD for export credits and IDA)
• ODA is still defined based on a minimum 25
  percent grant element (using a flat 10 percent
  discount rate)
• Efforts have been made to share and disseminate
  the concessionality policy widely
• The concessionality calculator and a detailed
  explanation of how it is used is available on the
  IMFs external website (http//www.imf.org/concess
  ionality)
• Interested parties can direct questions on the
  concessionality policy or the calculator through
  a dedicated mailbox (LendingToLICs_at_IMF.ORG)
• Support to debtors is also provided as needed

5
Concessionality and LICs

• All PRGFs or PSIs are expected to include a zero
  limit on nonconcessional borrowing
• Concessional flows remain the most appropriate
  source of external finance for LICs
• Capacity remains low and many expenditures do not
  generate the cash flow needed to service
  nonconcessional debt
• A minimum concessionality requirement can help
  borrowers obtain more suitable credit terms by
  raising awareness among lenders of their
  financial vulnerabilities

6
Concessionality and LICs

• Even after debt relief, concessional resources
  remain the most appropriate form of financing for
  LICs

7
Flexible Implementation

• The concessionality policy continues to be
  applied flexibly, allowing for exceptions on a
  case-by-case basis
• Based on debt sustainability, the availability of
  concessional resources, the strength of policies
  and debt management capacity, and the quality of
  the investment to be financed
• The DSF has helped refine the application of the
  concessionality policy

8
Non-Zero Limits

• Non-zero limits on nonconcessional debt apply in
  about a third of Fund-supported programs

9
Minimum Grant Element

• Depending on the debt sustainability outlook, the
  minimum grant element is adjusted upward in a
  program context

10
Financing Packages

• The use of combined financing instruments for a
  given project is growing, reflecting financial
  innovation and flexibility in financing design
• This potentially increases the availability of
  concessional resources to LICs
• The Fund has adapted its modalities of
  calculating the grant element to take this trend
  into account
• A number of elements are taken into consideration
  to support a determination of a financing package
  
• Identical intended use or purposes for the
  financing
• Inter-related schedules for disbursement
• Cross-conditions for entry into legal effect,
  availability of funds, and default
• Identical parties to the financing

11
Conclusions

• The Funds concessionality policy is intended to
• Support progress toward the MDGs without creating
  future debt problems
• Keep countries that have received debt relief on
  a sustainable track
• The policy has been applied flexibly
• Nonzero limits on nonconcessional borrowing apply
  in over 30 percent of PRGFs/PSIs
• Despite the reduction in debt levels due to
  generous debt relief, debt sustainability should
  not be taken for granted
• The number of low risk ratings is still too low
• Countries remain vulnerable to shocks
• Thus, concessional flows remain the most
  appropriate source of external finance for LICs
• Need to increase concessional resources to
  deserving LICs
• Need for creditor coordination to maximize the
  use of concessional resources

12

• Thank you
• mguerguil_at_imf.org
• Further details at http//www.imf.org/concessional
  ity
• Queries? LendingToLICs_at_imf.org