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Multilateral Debt Relief and Concessional Finance Reform at the IDB

Multilateral Debt Relief and Concessional Finance Reform at the IDB. 2007 MDB Meeting on Debt Issues Washington DC, July 11-12, 2007. 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

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Multilateral Debt Relief and Concessional Finance Reform at the IDB

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  1. Multilateral Debt Relief and Concessional Finance Reform at the IDB 2007 MDB Meeting on Debt Issues Washington DC, July 11-12, 2007

  2. 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

  3. IDB Debt Relief – how much?(In US$ millions)

  4. Impact of debt relief has been significant… Net Present Value (NPV) of External Public Debt (% of GDP) 73% *IMF estimates for 2006 include HIPC and MDRI relief ^ Guyana data as of end of 2002 Source: IMF, IDB.

  5. …and has improved debt burden indicators *Status as of 2003 **Status after IDB relief ^ Guyana data as of end 2002 Source: IMF, IDB, WB.

  6. IDB has given meaningful debt reduction… NPV of Outstanding Debt with the IDB (% of GDP) (*) after remaining HIPC relief (**) IDB HIPC includes interim relief. MDRI relief assumes completion point in 2009. Source: IDB.

  7. …providing fiscal space for higher expenditure to achieve MDGs IDB Interest Payment Relief (as a % of poverty reducing expenditure*) IDB Interest Payment Relief (yearly averages, in US$ millions) *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.

  8. 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

  9. 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

  10. Lending Strategy Matrix

  11. Parallel structure and concessionality levels Source: Concessionality calculated according to IMF methodology and discount rate (7.18%)

  12. Guidelines for lending strategies PARALLEL STRUCTURE FSO | OC *Concessionality calculated according to IMF methodology and discount rate (7,18%) ^ assumes grants until 2009

  13. 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

  14. 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

  15. 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 Performance is a weighted average of portfolio performance (30% ) and CIPE (70%).

  16. Thank YouMultilateral Debt Relief and Concessional Finance Reform at the IDB

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