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The Debt Reduction Facility for IDA-Only Countries

The Debt Reduction Facility for IDA-Only Countries. Boris Gamarra Economic Policy and Debt Department The World Bank Multilateral Development Banks Meeting Washington DC, July 9, 2008. I. Overview of the DRF. Background.

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The Debt Reduction Facility for IDA-Only Countries

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  1. The Debt Reduction Facilityfor IDA-Only Countries Boris Gamarra Economic Policy and Debt Department The World Bank Multilateral Development Banks Meeting Washington DC, July 9, 2008

  2. I. Overview of the DRF

  3. Background • Established by the Boards of IBRD and IDA in July 1989 with IDA as trustee • Objective: help eligible countries to reduce their sovereign commercial external debt as part of a broader debt resolution program • The DRF provides: • preparation grants to fund legal and financial advisers • implementation grants to finance debt buybacks • In April 2007 the Board extended the DRF until 2012 • In April 2008 the Board approved modifications to DRF policies and practices

  4. Why the DRF is needed • Many commercial creditors have not provided “proportional burden sharing” debt relief, as expected under the HIPC Initiative • Concerns about litigation by commercial creditors and aggressive acquisition of claims by “vulture funds” • Share of commercial debt is high in upcoming HIPC Initiative cases • commercial creditors represent 2.5%, 8.4% and 9.0% of the expected/estimated HIPC debt relief to post-completion point, interim period and pre-decision point countries, respectively

  5. Eligible countries • Countries must have reached HIPC decision point • Acceptable progress with a medium term program for economic development • A strategy for debt management which comprehensively address the commercial debt problem

  6. ELIGIBLE DEBT Public and Publicly Guaranteed (PPG) uninsured medium and long-term external commercial debt in arrears PPG uninsured short-term external commercial debt Debt must have been contracted and disbursed before the end of the “reference year” for HIPC decision point INELIGIBLE DEBT Bilateral debt or multilateral debt Domestic debt Third-party guaranteed debt Debt contracted after end of the “reference year” for HIPC decision point Debt that is time-barred under statutes of limitation Eligible and ineligible debt

  7. Characteristics of an operation • Debt buyback prepared, negotiated and implemented by the recipient Government and its advisers – not by IDA • Typically takes several years to complete (5 years in the case of Nicaragua) • Principal, interest and penalties/late fees all extinguished • Comprehensive – high participation essential • Deep discount requiring, at minimum, full delivery of HIPC Initiative debt relief • Advisers will still seek the best possible deal. • “best deal” will be assessed in terms of participation as well as pricing

  8. Financing • Since inception, $350 million of IBRD net income has been allocated to the DRF • There have also been co-financing contributions from Canada, Finland, France, Germany, IADB, Japan, Norway, the Netherlands, Russia, Sweden, Switzerland, EU, UK and USA (plus contributions from client countries themselves)

  9. II. Progress in DRF-Related Operations

  10. operations completed Around US$9 billion of debt principal and interest (P&I) has been extinguished in 24 completed (or nearly completed) buybacks 10 nearly completedplanned… Niger (91) 8 Mozambique I (91) 5+ Guyana I (92) Ethiopia (96) Uganda (93) Mauritania (96) Mozambique II (07) Bolivia (93) Senegal (96) 4 Nicaragua II (07-08) Sao Tome Principe (94) Togo (97) Liberia (08-09) Zambia (94) Vietnam (98) Sierra Leone II? Yemen (01) Albania (95) DR Congo? Cote d’Ivoire (98) Honduras (01) Cameroon (03) Sierra Leone I (95) Others? Guyana II (99) Tanzania (04) Nicaragua I (95) Guinea (00) 1991-1995 2007 onward 1996-2000 2001-04

  11. Mozambique – successfully closed • In April 2007, IDA Board approved a DRF implementation grant of up to US$16.1 million for a Second Operation for Mozambique • Addressing hold-out debt from 1991 DRF operation (participation rate of only 63%) • The operation has been successfully closed: • The Invitation to Creditors was finalized and issued in June 2007 • By August, all eligible creditors had tendered their debt • Closing payments were made on October 2007 • Final cost of debt purchase was US$13.7 million – entirely financed by Norway’s contribution

  12. Nicaragua – two successful closings • In July 2007, IDA Board approved a DRF implementation grant of up to US$61.0 million for a Second Operation for Nicaragua • Addressing hold-out debt from 1995 DRF operation (participation rate 81%) • Targeting Nicaragua’s remaining US$1.4 billion of eligible P&I • Total cost of around US$64.4 million will be financed roughly 50-50 by contributions from IBRD net income and contributions from Governments (including Finland, the Netherlands, Norway, Russia, Sweden and UK, plus a contribution from Nicaragua itself)

  13. Nicaragua – two successful closings • The Invitation to creditors was issued in October 2007 • The operation structured in three closings • The first two closings took place in December 2007 and February 2008: • The first closing included 12 of 13 eligible financial institutions and 8 suppliers – total claims US$1,325 million • The second closing involved the acceptance of further 18 creditors – total claims US$9.4 million • Cost of debt purchase under these two closings is US$60.2 million • The third closing is scheduled for end-July 2008.

  14. Nicaragua – two successful closings • Ground breaking operation for the DRF, in that: • Participation rate: 95 percent • It includes four creditors who together had US$275 million of judgments against Nicaragua: • more than a quarter of the value of reported court judgments against decision point HIPCs • more than two thirds of such judgments against post-completion point HIPCs

  15. Liberia • The Government of Liberia has started preparation of a Commercial Debt Reduction Operation • Preparation was financed by the Swiss Agency for Development and Cooperation up to the HIPC decision point • The IDA Board approved a DRF preparation grant in April 2008 • Stock of eligible debt estimated at about US$1.6 billion • The Government and its advisors held several meetings with commercial creditors • A buyback could take place in 2008-2009.

  16. DR Congo and Sierra Leone • A DRF preparation grant has been approved for the Democratic Republic of the Congo: • Work under way with the stock of eligible debt estimated at around US$200 million • However, progress has been slow so far • Currently DRC does not have a program with the IMF • A DRF preparation grant for Sierra Leone could be submitted to the Board in the coming months: • Stock of eligible debt estimated to be in the US$150-250 million range • The Bank team is currently exploring with the Government the feasibility of the preparation grant

  17. III. Modifications to the DRF policies and practices

  18. Country Eligibility • In 2004, Board decided to limit eligibility of the DRF to post-decision point HIPCs only • This served to: • align DRF with the HIPC Initiative • establish a cut off date for eligible debt • create parameters for the pricing of buybacks • constrain costs

  19. Country Eligibility • Modification: • Access to preparation grants prior to reaching decision point on a case-by-case basis.Eligibility for implementation grants remains at decision point • Could allow countries to move faster, by enabling them to be ready to implement a buyback immediately upon arrival at decision point • But would ensure that buybacks are only implemented with DRF support in countries with a track record and where HIPC Initiative parameters are established

  20. Debt Eligibility • Modification: • DRF-supported operations would normally exclude: • Former bilateral debts sold to commercial creditors after the HIPC decision point reference date • Former domestic debt sold to external creditors after the HIPC decision point reference date

  21. Participation Thresholds • Modification: • Participation rates should not normally be below 90 percent • DRF guidelines: DRF-supported operations should involve resolving the commercial debt problem in a comprehensive manner • However, participation rates in earlier operations were below 80% in 6 cases and below 65% in 2 cases • Low participation buybacks have caused problems: • The need for “clean up” second buybacks (e.g. Mozambique, Nicaragua, Sierra Leone)… • … with the value of “hold out” claims driven up?

  22. Co-financing • DRF recipients are expected to mobilize as much co-financing from other donors as possible • In 1989, a guideline was established that the IBRD net income contribution to a DRF-supported buyback should not normally exceed US$10 million • However exceptions to this guideline have been agreed in 7 out of the 22 buybacks to date • Modification: • IBRD net income contributions to the DRF should not normally exceed 50% of the costs of any given buyback

  23. Advisers fees • Modification: • Staff is allowed more flexibility on advisory fees, particularly in larger and more complex cases • For the past decade, preparation grants have been capped at $800-900k, regardless of size or complexity and without inflation adjustments • Increasingly challenging to recruit and retain quality financial and legal advisers with grants of this size

  24. Moving Forward • Challenges of operating in fragile state environments • Consider innovative modalities as part of DRF-supported operations • Timeliness of bilateral contributions

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