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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 1 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 2 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 3 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 4 …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. 5 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. 6 …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. 7 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 8 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 9 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 10 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% 11 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 12 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 13 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 14 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%). 15 Thank You Multilateral Debt Relief and Concessional Finance Reform at the IDB 16