Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized

June, 2008
REVIEW AND UPDATE

Resource Mobilization Department (FRM)

IDA’S NON-CONCESSIONAL BORROWING POLICY:
44591
 ABBREVIATIONS AND ACRONYMS

AFDB African Development Bank

ADF11 African Development Fund 11th resource replenishment.
AFESD Arab Fund for Economic and Social Development
AsDF Asian Development Fund
CFR Collateralized with Future Receipts
CIRR Commercial Interest Reference Rate
CAS Country Assistance Strategy
CP Completion Point under the HIPC Initiative
DAC Development Assistance Committee
DeMPA Debt Management Performance Assessment Tool
DPO Development Policy Operation
DSA Debt Sustainability Analysis
DSF Debt Sustainability Framework
EITI Extractive Industries Transparency Initiative
EMTA Emerging Market Traders Association
GNI Gross National Income
HIPC Heavily Indebted Poor Country
IBRD International Bank for Reconstruction and Development
IDA International Development Association
IFC International Finance Corporation
IMF International Monetary Fund
IsDB Islamic Development Bank
LIC Low Income Country
MDB Multilateral Development Bank
MDRI Multilateral Debt Relief Initiative
MDGs Millennium Development Goals
MIGA Multilateral Investment Guarantee Agency
MTDS Medium Term Debt Management Strategy
MVA Modified Volume Approach
NPV Net Present Value
ODA Official Development Assistance
OECD Organisation for Economic Co-operation and Development
PPG Public and Publicly Guaranteed
PEFA Public Expenditure and Financial Accountability Program
PRGF Poverty Reduction and Growth Facility
PSI Policy Support Instrument
 IDA’S NON-CONCESSIONAL BORROWING POLICY:
REVIEW AND UPDATE

Table of Contents

Executive Summary

I. Introduction..........................................................................................................................1

II. Update on Creditor Outreach and the DSF ..........................................................................3

III. Capacity Building in LICs to Manage New Borrowing ......................................................6

IV. Update on Recent Borrower Country Cases and Debtor Reporting ....................................8
The Case of Mali............................................................................................................9
The Case of Ghana.......................................................................................................10
Other Country Cases ....................................................................................................11
Debt Reporting.............................................................................................................13

V. Lessons Learned in the First Two Years of Implementation.............................................13

VI. Next Steps ..........................................................................................................................16

Annexes:
Annex 1: List of Countries Subject to IDA’s Non-Concessional Borrowing Policy in FY09 ...................18
Annex 2: List of Low-Income Countries Subject to the Non-Concessional Borrowing Policy of
IDA or the IMF ........................................................................................................................19
Annex 3: Principles that would guide exceptions to non-concessional borrowing ceilings.......................20
Annex 4: Elaboration of Select Elements of the NCBP .............................................................................21
Annex 5: Concessionality and Calculation of Grant Element under the NCBP.........................................24
 Executive Summary
1. Implementation of IDA’s Non-Concessional Borrowing Policy (NCBP) has been
moving well since the two-pronged policy was discussed by the Executive Board in July
2006. Bank and IMF staff have carried out an ambitious program of outreach to raise
awareness and encourage creditors to act in broad harmony with the Low Income Country
Debt Sustainability Framework (DSF). In a complement to the creditor outreach activity, the
Bank and IMF have also accelerated efforts to enhance borrowers’ debt management
capacity and the development of medium term debt management strategies. In addition a
number of cases of non-concessional borrowing were discussed by management and
appropriate IDA responses were determined on a case-by-case basis according to the
methodology set out in the policy framework.

2. The creditor outreach has had some success, but further dialogue is needed with
a few remaining multilateral creditors, private creditors and non-OECD bilateral
creditors. The African Development Bank (AfDB), Asian Development Bank (AsDB), and
the International Fund for Agricultural Development (IFAD) have all adopted grant
allocation systems similar to that of IDA. Other creditors like the Inter-American
Development Bank (IADB) take the risk of debt distress into account when determining the
level of concessionality to offer to countries. The AFDB also introduced a new policy on
non-concessional debt accumulation under ADF11 which is similar to the NCBP. The
OECD Export Credit Group agreed to a set of principles and guidelines on sustainable
lending that take the concessionality requirements of the Bank and the IMF into account.
Outreach efforts to other bilateral, multilateral and commercial creditors have increased
mutual understanding. The Bank and IMF have established dedicated webpages on their
respective websites that make individual DSAs as well as Bank and IMF concessionality
policies more easily accessible. In addition, email boxes have been established to respond to
questions from creditors regarding the DSF and concessionality policies. The Bank will
continue to seek outreach opportunities and improve dissemination.

3. Given the limited scope of the Bank and IMF to influence lending decisions of
other creditors, parallel capacity building efforts play an important complementary
role. A renewed focus has been on strengthening the capacity of borrowers to make sound
borrowing decisions. The Bank has made important progress in training LICs to use the
DSF. In addition the new Debt Management Performance Assessment (DeMPA) tool for
assessing debt management capacity has been used in 17 countries thus far. This tool along
with the DSF and the Medium-Term Debt Management Strategy tool under development will
help inform borrowers of the risks and trade-offs in any financing they are contemplating,
whether concessional or non-concessional. These tools also complement other Bank tools
and technical assistance programs to help increase the efficiency of overall government
expenditures, including PEFA assessments, tracking surveys, and fiscal space analyses.

4. The country cases assessed to date under the NCBP show a range of responses
under the policy, consistent with the parameters and the case-by-case approach set out
in the framework document. The cases were each very different and the responses in turn
were tailored to the specific case. Thus far, there has been one exception (the case of Mali),
two cases of hardening the terms (Angola and Ghana) to reflect the countries’ increased
 - ii -

market access, and two preliminary exceptions (Mauritania and Rwanda) based on
information provided thus far. The importance of sufficient and early information to make
appropriate and timely decisions has been apparent in all the cases assessed to date.

5. Implementation to date highlights the need for the NCBP to be part of a

broader, proactive Bank engagement. This engagement can take the form of capacity
building in the area of project appraisal and developing projects that could ultimately be
financed through traditional concessional financing, or even public private partnerships, in
addition to capacity building to enhance debt management and improve reporting
arrangements. The Bank’s advice in the area of oil revenue management can also help
resource-rich LICs with increased access to commercial finance increase predictability of oil
revenues and help ensure that these resources and borrowing linked to these resources,
contribute more broadly to poverty reduction.

6. The early engagement of the Bank in providing assistance to governments in

their public borrowing decisions and the continued outreach to creditors will hopefully
help minimize the number of non-concessional borrowing cases that require an ex-post
IDA response. There is a tension between the funding needed to finance national
development priorities and the desire to maintain debt sustainability. This can be reduced by
sound fiscal management, improved absorptive capacity, ensuring that investments are made
in high return projects and encouraging greater access to concessional sources of finance.
Where concessional financing remains constrained, IDA is well placed as a partner in helping
countries ensure that any non-concessional borrowing is used to finance priority development
needs through investments that are structured to generate sufficient returns and to minimize
debt distress risks.

7. Moving forward, the Bank will continue to reinforce the primary role of the
NCBP i.e., the prevention of a rapid reaccumulation of unsustainable debt while
enabling a country to gradually access additional financing where this is appropriate.
Since concessional financing remains the most appropriate form of financing for most LICs,
the Bank and IMF will continue their efforts to encourage all multilateral and bilateral
creditors, in particular non-traditional creditors to act in broad harmony with the DSF. In
parallel, the Bank and the IMF will also follow through on the work program of DSF
training, debt management capacity building and developing medium-term debt management
strategies. To improve the effectiveness of IDA’s ability to engage countries contemplating
non-concessional borrowing, IDA is prepared to be involved early on in helping countries to
assess investment projects for their returns to investment and impact on debt sustainability.
 I. Introduction

8. The purpose of this note is to provide an update on the implementation of the

Non-Concessional Borrowing Policy (NCBP) discussed by the IDA Board in July 2006,
and distill lessons learned. The NCBP was developed in response to donor concerns about
non-concessional borrowing risks in grant-eligible and post-MDRI countries.1 Debt relief
and IDA grants increase the borrowing space and financing options available to recipients,
thus presenting a challenge for recipients to manage that borrowing space effectively to
increase growth and meet poverty reduction targets while maintaining debt sustainability.
Given the risk that this may lead to a rapid reaccumulation of debt in LICs which are
receiving grants or debt relief, the Executive Board of IDA approved the NCBP framework
for IDA’s response to non-concessional borrowing risks in grant-eligible and post-MDRI
countries and asked staff to report back regularly on its implementation.2

9. The two-pronged policy involves creditor outreach as well as measures aimed at

borrowers to reduce the risk of overborrowing. The first pillar of the policy, the outreach
to other creditors, aims to encourage other creditors to incorporate debt sustainability
considerations and the DSF into their lending decisions. The second prong of the policy
involves measures aimed at borrowers, including enhanced capacity building efforts to help
countries manage their debt and a renewed emphasis on improved adherence to reporting
requirements. The second prong also involves the development of possible IDA responses
(reductions in volumes, or adjustment of IDA lending terms) to non-concessional borrowing,
taking into account, inter-alia, the impact of the borrowing on long term debt sustainability
and the appropriate use of IDA concessionality in countries with increased access to
commercial financing.

10. The policy itself is complementary to other policies and tools that the Bank has
in place to help countries maintain debt sustainability. The Low-Income Country Debt
Sustainability Framework (DSF) for instance is a joint tool developed and prepared by the
Bank and the IMF to help borrowers maintain debt sustainability and guide creditors in their
financing decisions. Additional capacity building in debt management and the development
of medium term debt management strategy tools are key aspects of the Bank and IMF’s
efforts to help countries maintain debt sustainability. IDA and other Multilateral
Development Banks in turn also use the DSF to tailor their own financing decisions,
providing the most concessional grant resources for countries at greater risk of debt distress.
The NCBP is designed to reinforce the measures taken by IDA and other creditors to help
countries maintain debt sustainability. These measures could be significantly undermined
should countries resort to non-concessional borrowing without strong assurances that this
borrowing will achieve the commensurate growth needed for the loan repayment.

11. The NCBP’s focus on non-concessional borrowing stems from the greater risks
that such borrowing puts on debt sustainability. As was pointed out in the October paper

1
For example, see April 23, 2006 Development Committee Communiqué, Washington, DC.
2
See IDA, “IDA Countries and Non-Concessional Debt: Dealing with the ‘Free Rider’ Problem in
IDA14 Grant Recipient and Post-MDRI Countries.” IDA/R2006-0137, June 2006. This paper is now
generally referred to as the Non-Concessional Borrowing Policy paper.
 -2-

prepared on the role of IDA in helping countries ensure debt sustainability, large volumes of
concessional financing could also increase debt distress risks.3 However, for a given
borrowing path, non-concessional borrowing yields a smaller net resource flow and worse
debt dynamics than concessional borrowing. Non-concessional lending increases debt ratios
more rapidly, and in general repayments are required more quickly, even though most
investments require a long gestation period to yield returns. Hence while any borrowing,
even on concessional terms, poses risks if the expected growth dividend does not materialize,
non-concessional financing poses a greater risk to debt sustainability.

12. A key building block of the NCBP is the establishment of minimum

concessionality requirements for grant-eligible or post-MDRI IDA-only countries,
complementing the concessionality requirements of the IMF.4 The minimum grant
element required under the NCBP is 35 percent or higher, should a higher minimum level be
required under an existing IMF arrangement. This definition used by the NCBP follows the
definition of concessionality adopted by the IMF for low-income countries in October 1995,
and is similar to the definition used by the OECD export credit agencies (see Annex 5). IMF
concessionality requirements apply only while a country has an IMF-supported program
(PRGF or PSI), and not all IDA countries have an IMF arrangement. As of May 5, 2008, 27
of the 49 countries subject to the NCBP also had IMF-supported arrangements (see Annex
2). Countries subject to the Bank’s non-concessional borrowing policy are required to
maintain a minimum grant element of 35 percent even when they are no longer under an IMF
arrangement.

13. While the NCBP sets minimum concessionality requirements, it is not a blanket
restriction on non-concessional borrowing. When concessional financing is highly
constrained, a tension arises between the need to finance key development priorities and the
need to maintain debt sustainability. The policy acknowledges that under certain
circumstances non-concessional loans can appropriately be part of a financing mix that helps
promote economic growth. Although concessional financing remains the most appropriate
form of financing for most LICs, the policy contains a set of specific criteria for a case-by-
case assessment of situations where non-concessional borrowing may warrant an exception
to the policy. This is described in detail in Annex 3.

14. This paper provides an update on progress in implementing the two key pillars
of the NCB policy, and lessons learned. The paper updates the information provided in the
paper on the role of IDA in ensuring debt sustainability, sent to the Board in October 2007,
which included an update on progress in implementing the NCBP.5 The paper is structured
as follows: Section II provides an update on creditor outreach and the DSF; Section III
provides an overview of progress made in capacity building for debt management; Section
IV provides an overview of IDA’s response in the country cases assessed to date under the

3
See IDA, “The Role of IDA in Ensuring Debt Sustainability: A Progress Report.” IDA/SecM2007-
0590, October 12, 2007.
4
This excludes IDA “gap” countries which have been above the IDA per capita income cutoff for more
than 3 years, and are no longer eligible for IDA grants. See Annex 5 for a detailed description of the
concessionality calculations used in the NCBP.
5
See IDA, “The Role of IDA in Ensuring Debt Sustainability: A Progress Report.” IDA/SecM2007-
0590, October 12, 2007.
 -3-

NCBP; Section V discusses some of the lessons learned in implementing the policy; and
section VI discusses next steps.

II. Update on Creditor Outreach and the DSF

15. Since IDA is only one of many financing partners, debt sustainability is
dependent on influencing the lending behavior of many creditors, both sovereign and
non-sovereign and hence creditor outreach is vital. IDA jointly with the IMF has
continued outreach efforts on the DSF with nearly all major multilateral and bilateral
creditors to low-income countries. This includes extensive outreach activities involving the
Export Credit Group of the OECD, the Berne Union (of export credit insurers), all
multilateral creditors that have also been involved in the HIPC Initiative, commercial
creditors, and emerging market bilateral creditors.

16. As a result of the outreach program, an increasing number of MDBs are

incorporating elements of the DSF into their own financing terms. The African
Development Fund, the Asian Development Fund, and IFAD have adopted grant allocation
systems that are almost identical to that of IDA, with a similar traffic light system and a
modified volume approach. Following IaDB debt relief, the IaDB also takes DSF risk ratings
into account in their new lending terms by combining their non-concessional ordinary capital
(OC) lending resources with their concessional fund for special operations (FSO), to
modulate the level of concessionality for LICs in line with the DSF risk rating. Given their
historical share of borrowing from MDBs, these developments could potentially have an
important impact on the trajectory of debt ratios in many LICs.

17. An agreement was reached in December 2007 which provides a more active role
for the major regional banks in the DSA process. This agreement acknowledges the
willingness expressed by these institutions to harmonize their lending practices broadly along
the lines suggested by the risk assessments contained in DSAs carried out by Bank and IMF
staff.

18. The African Development Bank recently developed its own policy on non-
concessional debt accumulation, in response to donor requests under ADF11. The new
AfDB policy mirrors IDA’s policy, with two pillars: outreach to creditors and disincentive
mechanisms at the borrower level.6 This should help reinforce IDA’s own policy, and
provide a stronger incentive for creditors and borrowers to ensure that new borrowing is in
line with debt sustainability.

19. The OECD Working Group on Export Credits and Guarantees (ECG) adopted
a set of sustainable lending guidelines in January 2008. In a series of meetings and
workshops that led to the adoption of the sustainable lending guidelines, the active
participation of non-OECD creditors was encouraged by the ECG. The Principles and
Guidelines to Promote Sustainable Lending Practices in the Provision of Official Export
Credits to Low-Income Countries, include an agreement to adhere to IDA and IMF

6
See African Development Bank, “Bank Group Policy on Non-Concessional Debt Accumulation”,
ADF/BD/WP/2008/09/Rev.1, 28 March 2008.
 -4-

concessionality requirements in low-income countries.7 The agreement is posted on the

OECD website, and includes a comprehensive table on Bank and IMF concessionality
requirements by country, which is updated for that audience on a monthly basis (reproduced
in Annex 1). Bank and IMF staff will continue to engage with this group of creditors as they
implement the newly agreed sustainable lending guidelines. At these meetings non-OECD
creditors were encouraged to adopt a similar set of sustainable lending guidelines as those
adopted by the OECD ECG. While the non-OECD creditors were not in a position to adopt
the sustainable lending guidelines, they indicated their interest in continued collaboration
with the international community in this area.

20. Particularly important given the volumes of new financing from non-OECD
bilateral creditors have been the discussions held with the major external financing
institutions of these countries. As outlined in the IDA15 paper on debt sustainability,
constructive discussions have been held with China and India in particular leading to
improved mutual understanding. In the spirit of cooperation and information sharing, an
MOU was signed in May 2007 between the China Exim Bank and the World Bank. The
MOU between the two institutions aims to “enhance their ongoing cooperation within their
respective authority (including staff secondments, knowledge sharing and exchange on
various aspects of development assistance, such as fiduciary and financial management,
procurement, and environmental and social impact analyses)”.

21. A partnership has evolved since the signing of the MOU between the Bank and
China Exim Bank. This has included a broad set of discussions and training events to
compare approaches to debt sustainability, fiduciary and financial management, procurement,
environmental safeguard analysis and social impact analyses. Opportunities for coordinated
financing are being explored, though no specific operation has yet been concretized. A first
joint World Bank-China Exim Bank mission took place in March 2008 to explore possible
collaboration on a regional transport and trade facilitation project in Ghana. A team from the
Bank joined the West Africa Power Pool authorities for discussions in Beijing regarding
investment in the power sector. The Government of Rwanda is also seeking joint World
Bank – China Exim Bank support for agricultural development. In addition to exploring
coordinated financing opportunities, a Staff Exchange Program is underway with two China
Exim Bank staff members working in the Africa transport and energy divisions; Exim staff
will also work in the Bank’s East Asia region as part of the exchange. The Bank is also
exploring cooperation prospects in East Asia and another secondment is being considered for
the Sydney office to work on Pacific Island cooperation.

22. Opportunities to reach out to commercial creditors are also being pursued.
Discussions have been held with representatives from investment banks to share information
on the DSF. Bank and IMF staff also attended a meeting with the Emerging Market Traders
Association in November 2007 to discuss the role for the private sector in financing African
development post-HIPC. Based on these discussions commercial creditors communicated a
desire for more information on the Bank and IMF concessionality policies, more widespread

7
See OECD Trade and Agriculture Directorate, Working Party on Export Credits and Credit
Guarantees, “Principles and Guidelines to Promote Sustainable Lending Practices in the Provision of
Official Export Credits to Low-Income Countries”, TAD/ECG(2008)1, January, 2008.
 -5-

outreach on the DSF, greater access to country-specific data underlying the DSAs, and a
formal process to respond to creditor inquiries about concessionality policies.8 The Bank
also made a presentation on the opportunities and risks in lending to LICs and IDA’s role at
the Paris Club’s annual meeting with commercial creditors. Such exchanges afford
opportunities to the Bank to learn more about the policies of other creditors, including their
risk assessments and other factors that determine their lending decisions. It also enables
improved information flows to these creditors.

23. The Bank and IMF continue to seek ways to enhance dissemination of the DSF
and to improve understanding of the Bank and IMF concessionality policies. A
dedicated webpage on the Bank and on the IMF websites provides ready access to each
published DSA.9 This site also provides easy links to various DSF policy documents and the
DSF user’s guide. As the NCBP applies to grant-eligible and IDA-only post-MDRI countries
(see Annex 1), the list changes slightly from year to year and is posted on the external
website. The IMF also updates the list of countries under IMF-supported arrangements
regularly on its website.10

24. Given that the level of concessionality is a key consideration, the Bank and IMF
have also sought to provide clarity on the concessionality requirements of each
institution. The Bank and IMF utilize an identical calculation of concessionality to
determine whether a particular loan contains the required minimum grant element. This
calculation utilizes CIRR discount rates plus a margin to calculate the grant element (see
Annex 5 for a detailed description of the grant element calculation). To facilitate
understanding of this definition, a concessionality calculator is accessible on both Bank and
IMF websites, along with relevant information on the Bank and IMF concessionality policies
and definitions.11

25. To help creditors in making lending decisions that take debt sustainability and
concessionality requirements into account, the Bank and the IMF have established
special email service accounts. These e-mail accounts were established in response to
requests from creditors (LendingToLICS@worldbank.org and LendingToLICS@imf.org).
The e-mail accounts enable creditors to ask for clarification on the DSF, aspects of Bank or
IMF concessionality policies, and the application of these policies in specific countries where
creditors may be contemplating doing business. Over the last few months, staff has been
responding to a steady stream of inquiries primarily from the Export Credit Group of the
OECD stemming from commitments made under their sustainable lending guidelines.

8
Due to confidentiality issues surrounding the assumptions of key macroeconomic variables underlying
the analysis in the DSAs and data provided by the authorities, Bank and IMF staff cannot directly share
the detailed DSF spreadsheets for a particular country with creditors. However, the country has the
prerogative to share its own country-specific data with creditors should they request it directly from the
country.
9
See http://go.worldbank.org/IKDY0HLKM0 and http://imf.org/dsa.
10
The IMF publishes a list of PRGF-eligible countries along with their relevant minimum
concessionality requirements under IMF-supported arrangements at
http://www.imf.org/external/pubs/ft/dsa/dsalist.pdf.
11
This website can be accessed via the World Bank external website by searching for “non-
concessional”, and via the IMF external website (http://imf.org/concessionality).
 -6-

26. As a result of the outreach program, the Bank has also clarified its approach to
integrated financing packages. The practice of creditors of combining various loans and
grants into a joint package of assistance has been a feature that has been emphasized in
inquiries to the Bank and IMF mailboxes. Similar to the practice at the IMF, the NCBP
would look at the following factors in determining whether a financing package is integrated:
(i) whether the various financing elements fund a project with an identical purpose; (ii)
whether the disbursement schedules are inter-related; and (iii) whether there are cross
conditions for entry into effect, availability of funds, etc. A financing package that includes a
number of these elements is likely to be assessed as an “integrated package” for purposes of
meeting the concessionality requirements, and the weighted grant element of the various
components would be calculated. Annex 4 elaborates further on the treatment of integrated
financing packages, and provides clarity on how the NCBP defines a public enterprise.

27. While the outreach program has generally been successful, some creditors,
including a few MDBs, are still offering non-concessional terms to many grant-eligible
and post-MDRI countries. While many of these loan offers have not led to the signing of
non-concessional loan agreements, outreach efforts continue in an effort to convince all
remaining multilateral creditors to offer grant-eligible and post-MDRI countries new
financing that is consistent with the country’s repayment capacity and allows the country to
respect its concessionality obligations to IDA and the IMF. An agreement was reached with
the Islamic Development Bank (IsDB) in December 2007 on a clear methodology for
calculating the grant element of Islamic Financing, which may help reduce uncertainty and
ensure that the terms offered by MDBs whose financing must meet Islamic Law, also meet
the Bank and IMF concessionality requirements. At the upcoming July meeting of
multilateral creditors to be hosted by the Bank, the DSF and the NCBP along with debt
management will again be the key agenda items.

28. The Bank will continue to explore increased opportunities for collaboration with
all creditors. The Bank will continue sharing data and offering technical workshops to
familiarize creditors with the details of debt sustainability analyses and the non-concessional
borrowing policy. Other creditors also have outreach programs similar to the Bank and IMF.
For instance the AfDB will also enhance its dialogue with other creditors as part of its own
non-concessional borrowing policy. Similarly, in 2007 and 2008, OECD Export Credit
Agencies invited Non-OECD creditors to their semi-annual meetings where Bank and IMF
staff were asked to make presentations on debt sustainability and concessionality.

III. Capacity Building in LICs to Manage New Borrowing

29. The newly established Debt Sustainability Framework (DSF) for Low Income
Countries is an important tool that helps identify debt-related vulnerabilities. The Bank
and the IMF have continued their efforts to build capacity in LICs to use the DSF over the
past few years. As part of these efforts, the Bank, in partnership with the Fund and regional
capacity building institutions, has organized a number of training workshops on the DSF.
Country officials from most IDA-only borrowers have now attended these workshops.
Recent workshops have been given in Mexico City, Accra, Dakar, Maputo, and Windhoek.
As a result, these countries are in a better position to analyze the long-term impact of
 -7-

alternative financing strategies and to communicate with donors, lenders, and other
stakeholders using the DSF.

30. The World Bank and the IMF are also scaling up their work program to help
improve debt management in LICs. This effort follows the discussion of the Bank-Fund
paper on strengthening debt management practices at the Boards of both institutions.12 The
immediate work program has two components:

o The Debt Management Performance Assessment (DeMPA) tool, which

is a diagnostic tool developed by the Bank for identifying strengths and
weaknesses in debt management operations through a comprehensive set
of indicators spanning the full range of government debt management
functions. The DeMPA diagnostic tool was jointly developed by the
Bank’s PREM and Treasury departments, and the methodology was
adapted from the Public Expenditure and Financial Accountability (PEFA)
framework. To support countries in strengthening their debt management
capacity, the DeMPA tool presents 15 debt performance indicators along
with a scoring methodology. It is complemented by a guide that provides
supplemental information on the use of the indicators, and can be used by
all debt management practitioners.
o Technical Assistance in designing Medium-Term Debt Management
Strategies (MTDS), which comprises a toolkit for LICs developed jointly
with the IMF, including a guidance note on the process of designing and
implementing a debt management strategy in a LIC context, a template for
strategy documentation, and quantitative cost-risk analysis tools. An
MTDS draws from the existing DSF, and helps to operationalize a
country’s debt management objectives by outlining cost-risk tradeoffs in
meeting the government’s financing needs and payment obligations. Such
a strategy would express the government’s preferences with regard to cost-
risk tradeoffs in the form of the desired composition of debt, and by
describing the financing plan that the government intends to implement to
achieve this composition. An MTDS would also have a strong focus on
managing the specific risk exposure in the debt portfolio, analyzing
potential variation in the cost of debt servicing, and assessing its impact on
the budget.
31. Implementation of the Bank’s scaled-up work program on debt management is
underway. In the pilot phase the DeMPA tool was field tested in Albania, Guyana, The
Gambia, Malawi, and Nicaragua. As of end-May 2008, Bank staff have undertaken 12
additional DeMPA assessments in LICs in addition to the 5 pilot assessments undertaken as
part of the development phase of the DeMPA tool. The DeMPA tool and a guide to using the
tool have been posted on the Bank’s external website. The assessments will help pinpoint the
weaknesses that need to be addressed through increased capacity building. Bank and Fund
staff have now drafted the MTDS guidance note, designed the template for strategy

12
See IMF and World Bank, “Strengthening Debt Management Practices – Lessons from Country
Experiences and Issues Going Forward”, April, 2007.
 -8-

documentation and have an early version of the cost-risk analysis tool. This toolkit has been
field tested in Bangladesh and Ghana and additional field tests will be carried out this
calendar year. A joint Bank-Fund paper that reports on the implementation progress of this
work program will be presented to the Boards of both institutions in early 2009.

32. In addition to the development of these tools, the Bank’s Treasury Department
also provides technical assistance in monitoring and analyzing financial risks in debt
structures. This work takes place at two levels; first through advisory work in collaboration
with individual countries on demand, and second through knowledge dissemination, training,
outreach and research. The advisory work involves the delivery of a comprehensive
diagnostic for public debt management, usually in conjunction with a domestic debt market
development diagnostic provided by the Financial and Private Sector Development Vice
Presidency (FPD). Depending on demand, this is followed by detailed analysis on specific
issues, reform plan development, and guidance on implementing the reform plans, often
acting as a “sounding board”. The Treasury Department also provides intensive, one-week
workshops on designing and implementing government debt management strategies. It has
undertaken research and produced papers and publications on institutional arrangement for
debt management, linkages with macroeconomic policies and other relevant topics.13

IV. Update on Borrower Country Cases and Debtor Reporting

33. The NCBP requires assessing each case of non-concessional borrowing on its
own merits. In certain circumstances non-concessional borrowing may be warranted if the
financing unlocks a proven bottleneck to development, particularly in a strong-performing
country. The elements that the Bank takes into consideration to determine the appropriate
response are outlined in Annex 3. These include country specific factors such as the overall
borrowing plans of the country, the impact of additional borrowing on the macroeconomic
framework, the impact on the risk of debt distress, and the strength of policies and
institutions. The loan-specific factors look at the development content of the loan and the
rates of return, the equity stake of the lender, whether there are additional costs, and the
overall concessionality of the financing package.

34. In the last year, several new cases have been discussed by Bank Management in
addition to the earlier case of Angola.14 As described in the NCBP policy document, the
Bank has set out a process to assess non-concessional borrowing in countries subject to the
NCBP. The process first establishes whether public or publicly-guaranteed non-concessional
borrowing was contracted. Where such borrowing was contracted, country teams discuss the
nature and the terms of the non-concessional borrowing with the authorities. An internal
Bank note is then prepared and discussed by the NCBP committee which makes
recommendations to management based on country-specific and loan-specific factors
outlined in Annex 3. Once management has discussed and decided on the appropriate IDA
response, the Board is informed of any disincentive mechanism before the next project for

13
See for instance World Bank (2007). Managing Public Debt: From Diagnostics to Reform
Implementation.
14
For more detail on the Angola case, see IDA, “The Role of IDA in Ensuring Debt Sustainability: A
Progress Report.” IDA/SecM2007-0590, October 12, 2007, pp 21-22.
 -9-

that country is presented to the Executive Board. In two of the cases discussed to date
(Angola and Ghana), management has agreed that there is a need for an IDA response and
modified lending terms. In the case of Mali an exception to the policy was provided.

The Case of Mali

35. Mali entered into a non-concessional external financing agreement with the
Islamic Development Bank (IsDB) in July 2007 for about US$70.7 million, equivalent to
about 1 percent of Mali’s 2007 GNI. The financing was to meet a critical need for
additional electricity generation capacity to ease a short term crisis in the energy sector. The
country agreed to share the financing agreements with the Bank in order to assess whether
the loan could be granted an exception from a Bank response under the NCBP.

36. At the country level, strong policies and institutions provide some confidence in
Mali’s ability to manage some modest levels of non-concessional borrowing for a critical
economic need. Mali is a relatively strong performer as measured by its CPIA (3.7 in 2007).
According to a recently completed public expenditure and fiduciary assessment (PEFA),
Mali was rated above average on some aspects of public financial management, including
budget preparation. Mali has a good track record in macroeconomic management and
prudent fiscal policy, and despite this exceptional occurrence, has committed to a prudent
debt policy. The looming energy crisis and the shortage of concessional funds in FY08 to
finance a quick response, was an extenuating circumstance in the decision of Mali to accept
the financing from the IsDB. In addition, staff assessed the debt sustainability impact of the
borrowing to be minimal, and Mali’s low risk of debt distress will be unaffected.

37. The project would to finance a 60 megawatt power plant, which is expected to
generate sufficiently high economic and financial rates of return to justify the loan. The
agreement with the Islamic Development Bank is comprised of an interest-free loan of about
$9.4 million, and a lease agreement of approximately $61.3 million. The overall grant
element of the package was 8.4 percent compared to the minimum grant element required
under the NCBP and the PRGF for Mali of 35 percent. However, the power plant is
estimated to have a high economic and financial rate of return. The project also aims at
avoiding power cuts and contributing to sustaining the current average real economic growth
of 5 percent. Additional costs of the project include the cost of insurance, and the cost of fuel
to run the power plant. After the 15 year lease, Mali will fully own the power plant.

38. The strong justification at both the country level and the project level led the
NCBP Committee to recommend granting an exception for the loan financing to the
Management. Management agreed that a waiver was justified due to: (i) Mali’s urgent need
for additional electricity generation capacity; (ii) the high expected economic and financial
rates of return of the project; (iii) the strength of Mali’s policies and institutions; and (iv) the
modest size of the financing and the minimal impact on Mali’s macroeconomic framework
and debt sustainability. The IMF had also granted a waiver to Mali in the context of Mali’s
concessionality requirements under the PRGF arrangement.
 - 10 -

The Case of Ghana

39. Non-concessional borrowing in Ghana was assessed by IDA following the

September 2007 Ghana issue of a $750 million Eurobond on international capital
markets, and a $292 million non-concessional loan agreement with China Exim Bank.
The Eurobond was issued on September 27, 2007 with a ten-year bullet repayment of the
principal and a fixed coupon of 8.5 percent. The China Exim Bank loan was signed on
September 25, 2007, and carries an average interest rate of 6.1 percent with a 17-year
amortization, and a zero grant element.

40. A key consideration in IDA’s response is the strength of Ghana’s policies and
institutions and the impact of the borrowing on the economy. Ghana’s CPIA at 4.0 in
2007 is in the top quintile of IDA borrowers. While Ghana’s public financial management is
assessed as being strong, Ghana’s decision to borrow non-concessionally stems from the
desire to increase public investments to sustain economic growth towards meeting the
MDGs. In particular, the impetus to borrow was driven by the energy crisis which deepened
in the second half of 2006 and early 2007. The authorities discussed their intention to access
international capital markets with the World Bank as early as February 2007, and plans for a
portion of the anticipated borrowing were included in the 2007 budget.

41. Some uncertainty remains as to the potential returns to planned investments.

The 2007 supplementary budget allocated about $357 million from the bond proceeds to
energy investments, with another $13 million set aside for road-sector investments,
accounting for about 50 percent of the Eurobond proceeds. Investment plans were also
outlined in the 2008 budget which included over $360 million of investments in the energy
sector. Meanwhile, the China Exim Bank loan was dedicated to finance the construction of
the hydroelectric power plant at Bui, which is expected to result in about 1,000GWh of
annual generation, and a proposed installed capacity of 400MW. At this stage, however, the
precise terms and conditions of this contract are unknown, and hence the project-specific
rates of return cannot be assessed.

42. The large size of the non-concessional borrowing contracted raised concerns
regarding its impact on the country’s debt distress risks. The magnitude of the Eurobond
issue and the China Exim Bank loan combined is equivalent to about 8 percent of Ghana’s
2006 GNI. At the same time, however the impact of the borrowing on Ghana’s most recent
DSA is relatively limited primarily because the government’s intention to borrow about $250
million per year between 2007 and 2009 and US$350 million per year thereafter on non-
concessional terms was already included in the 2007 DSA. Under that DSA, Ghana’s risk of
debt distress rating is “moderate, albeit close to the low risk category”.15 The non-
concessional borrowing contracted at the end of 2007 frontloaded the non-concessional
borrowing plans outlined in the DSA and, in the absence of other adjustments to the DSA,
shifted Ghana even further away from the low risk category.

15
Joint World Bank-IMF DSA, Ghana IMF Staff Report for the 2007 Article IV Consultation, May 7,
2007, p. 30.
 - 11 -

43. IDA Management took these factors into account in deciding that the terms of
IDA’s financial assistance should be on blend terms in line with Ghana’s increased
market access.16 Management agreed that while there is some evidence of economic merit
to Ghana’s non-concessional borrowing, the Government’s increased access to market
finance and its sizeable non-concessional borrowing in 2007 warranted reconsidering the
terms of IDA’s assistance. The response by Management to provide blend terms for Ghana
recognized the increased access to market financing, but also recognized the country’s strong
policies and institutions, the urgent need for additional financing for power generation, the
early discussions with the Bank on the country’s search for additional concessional finance,
and the importance of IDA’s continued full engagement with Ghana as it makes important
investment decisions.

44. Additional steps are being taken by the Government and the Bank to ensure that
the country’s investment program addresses the country’s infrastructure needs. The
Government of Ghana established a Project Finance Analysis (PFA) unit at the Ministry of
Finance and Economic Planning to analyze, monitor, and evaluate new investment projects
that the government deems eligible for support. The new unit will also be responsible for
helping project sponsors leverage private financing by helping to set up Public-Private
Partnership Agreements and Private Finance Initiative. The Bank team will support a strong
program of technical assistance in the area of project appraisal and public private partnership.
Ghana has participated in the DeMPA and the MTDS analytical exercise, based upon which
the Bank team will strengthen arrangements and support for Ghana’s capacity building
efforts for debt management and reporting.

45. The terms of IDA assistance to Ghana will be reassessed by the end of FY09. A
reassessment at that time should benefit from information on the eventual decisions of the
government on the use of the remaining financing from the Eurobond issue and cost-benefit
analyses for the intended investments. The reassessment will also take into account the
volume and use of any additional non-concessional financing contracted in the intervening
period.

Other Country Cases

46. Mauritania signed two loan contracts on non-concessional terms, but was
provided a preliminary exception to the NCBP on the basis of information provided to
the Bank that the loans were being renegotiated on more favorable terms. Two non-
concessional loans were signed by Mauritania in 2007. The first loan from the Arab Fund for
Economic and Social Development (AFESD) for about $129 million to finance drinking
water in Nouakchott was provided with a grant element of 34.6 percent, just short of the 35
percent level.17 An agreement in principle on more favorable terms led to an IMF waiver.

16
IDA blend terms imply a reduction in the maturity period from 40 to 35 years, while still keeping the
ten-year grace period and the current service charges (0.75 percent). With these changes, the terms for
IDA credits would carry a 57 percent grant element, compared to standard IDA terms, which are
equivalent to a 60 percent grant element.
17
For more on this borrowing, see IMF Islamic Republic of Mauritania: Second Review under the Three-
Year Arrangement Under the Poverty Reduction and Growth Facility and Request for a Waiver of
Performance Criterion – Staff Report, November 5, 2007.
 - 12 -

The second publicly-guaranteed loan from the IsDB for about $18 million aims to boost the
electricity production capacity of SOMELEC, the national electricity company. Because the
loan and lease package did not meet the minimum concessionality requirement under the
IMF and World Bank policies, a supplemental grant from Japan that would be part of an
overall integrated package of financing was agreed to in principle by the IsDB and Japan.
On the basis of this a waiver of the performance criteria on non-concessional borrowing was
also provided by the IMF Board.

47. Rwanda was given an exception to the NCBP for $100 million in planned
borrowing to finance an energy project from the Exim Bank of India on terms with a
grant element of 40 percent. Since IDA uses the same minimum concessionality
requirement as that in the IMF program, in the case of Rwanda the PRGF program requires a
minimum grant element of 50 percent, as does the NCBP. Where country authorities request
a waiver of the performance criteria on minimum concessionality from the IMF, IDA
currently has the flexibility to accept the IMF's waiver as per the NCBP document.18 At the
country’s request, the IMF modified the performance criteria for Rwanda under the fourth
review of the PRGF facility to include a non-zero ceiling for non-concessional borrowing
from India Exim Bank at a grant element of 40 percent.19 This proposed financing of the
Nyabarongo hydro power project is projected to result in the production of urgently needed
electricity at a cost of about 0.065 US$/kWh allowing Rwanda to gradually eliminate
recurrent subsidies and reduce the electricity tariffs towards levels competitive on a regional
basis. The World Bank has been involved upstream in this decision, and has made a positive
assessment of the financial viability of the project and the fit within the least cost electricity
generation expansion plan.

48. Bank and IMF staff have been working closely with the Democratic Republic of
Congo (DRC) authorities to assess the implications of a framework agreement between
China and the DRC for $9.2 billion in financing on non-concessional terms. The
agreement calls for about $3 billion in lending for mining investments, $3 billion in financing
for infrastructure investments, and an option for an addition $3 billion in infrastructure
investments to be determined at a later stage. Early discussion with the authorities on the
financing is aimed at determining whether an approach can be developed that would enable
DRC to reach HIPC Completion Point and benefit from China’s investment in critical,
growth oriented projects. The IMF and Bank teams are learning more about the specific
terms of the investment and the status of the infrastructure projects that will be financed by
the loans. The findings of the joint Bank-Fund team will be used to assess the implications
of the financing for DRC’s debt sustainability.

49. While other cases of potential non-concessional borrowing have come to the
attention of country teams, there is still insufficient information on these cases to be
able to assess them under the policy. Because loans reported via the OP14.10 reporting

18
See IDA/R2006-0137, June 2006, p.11, "...such waiver could also be accepted by IDA for the purposes
of classifying the concerned loan as an acceptable case of non-concessional borrowing".
19
See IMF, Rwanda—Fourth Review Under the Three-Year Arrangement Under the Poverty Reduction
and Growth Facility, Request for Waiver of Nonobservance of Performance Criterion and
Modification of Performance Criteria, June 2, 2008.
 - 13 -

obligation are reported on a case by case basis, many small non-concessional loans are
identified that are in fact part of an integrated financing package that is concessional
overall.20 The media or country teams have been the source of reports on a number of cases
of planned or actual borrowing in various LICs. Staff are following up with authorities on
these cases. In some cases, such as in Tajikistan, the lending terms appear to meet the
minimum concessionality requirements, while in other cases there is an ongoing dialogue
between the Bank country team and the borrowing country to determine the nature of the
financing.

Debt Reporting

50. Debt reporting has improved somewhat as a result of increased efforts to

encourage adherence to OP14.10. A special Bank working group has been leading the
efforts to increase adherence to reporting requirements under OP14.10 and increase the
quality of these reports.21 Only 16 IDA-only countries had not yet provided their annual
reports under OP14.10 by the end of July, 2007. This adherence level was about two months
ahead of reporting performance from previous years. Countries that were not compliant with
the annual reporting requirement were informed that they are required to submit their end-
2006 annual report or provide an acceptable action plan for such reporting before any new
IDA operation can be presented to the Board. Subsequently five additional countries
submitted acceptable reports, including one country which reported for the first time in
almost a decade. By the end of May, 2008, 62 percent of IDA-only countries were compliant
with debt reporting requirements and 23 countries had not yet reported. At this rate, we
expect significantly increased compliance with the Bank’s debt reporting requirements, as
compared to end of July 2007. However, more progress is needed on quarterly reporting for
IDA to have timely information.

V. Lessons Learned in the First Two years of Implementation

51. The implementation of the NCBP over the last two years has generated a
number of lessons despite the limited number of cases assessed to date. The
implementation of the policy has demonstrated the limitations of the NCBP, as well as its
benefits. It has also demonstrated the need to look at IDA’s response to non-concessional
borrowing within the overall country dialogue and to recognize that it is only one policy
instrument in helping countries to maintain debt sustainability. At the same time, the NCBP
points to areas where the Bank can be proactive in helping countries interact with creditors
and disseminating ongoing research and knowledge on issues such as the management of
natural resource wealth and project evaluation.

52. There are some limitations to the ability of the NCBP to affect policy decisions,
in particular when IDA financing is small relative to other external financing sources
and when information is inadequate. The significant borrowing by Angola is an example

20
See Annex IV for more information on how to assess integrated financing packages.
21
The first measures included increased scrutiny for countries ahead of Board presentation, and special
reminder letters were sent out at the beginning of the year to all IDA-only countries. Where reports are
incomplete or are internally inconsistent, a further dialogue with the country authorities takes place to
correct the inconsistencies.
 - 14 -

of a case where the response by IDA was unlikely to affect the decision to borrow. IDA’s
financing to Angola has historically been only a small proportion of Angola’s overall
external financing. The recent approval in the AfDB of a similar non-concessional
borrowing policy to that of IDA will help improve the ability of the policies to affect
borrowing decisions.

53. At the same time, the NCBP may in itself lead to better financing terms. The
advanced reporting requirement introduced by the NCBP stipulates that countries report to
the Bank their plans for non-concessional borrowing ahead of contracting the loans. The
supplemental letter on Financial and Economic Data that is included in the signing package
for all IDA Credit and Grant Agreements was revised to include this new requirement for
grant-eligible and post-MDRI countries. This gives the Bank a chance to present the country
with alternative financing scenarios and implications of such borrowing. As a result, several
countries discussed with the respective Bank country team their desire to increase access to
financing, and indicated that without additional concessional financing, they would consider
commercial financing for important infrastructure investments. Country teams that are made
aware of such borrowing plans have reminded the government of the minimum
concessionality requirements, and engaged the government in a dialogue on available options
to finance the investments. In this way, the NCBP concessionality requirements provide an
incentive for governments to negotiate with creditors to secure more concessional financing
terms.

54. There are examples of countries that are seeking Bank advice when considering
projects that would merit nonconcessional financing, including post-MDRI countries
with low risk of debt distress and with strong policies and institutions. In addition to
scaling-up capacity building efforts on debt management, and helping to develop an MTDS
toolkit, other financing options can also be pursued. For instance, the Bank can focus on
ways to mobilize additional private capital to complement ongoing and planned public
investments. It can also outline the menu of financing options from the Bank group,
including guarantees from IDA and MIGA, investment financing (debt, equity and quasi-
equity) from IFC, and IBRD enclave lending and enclave guarantees to provide additional
support to a country’s infrastructure development. In the context of public expenditure
reviews (PERs) and assessments of fiscal space, the Bank can also provide advice on ways to
seek efficiency savings in spending (reduce waste, improve efficiency, shift composition)
and improvements in tax administration that may open up room for greater spending on
infrastructure, and reduce the need for borrowing.

55. The Bank has a broad toolkit of products to help countries improve debt
sustainability prospects, and the NCBP and the DSF are only two elements of the
Bank’s broader engagement strategy, particularly in resource rich countries with easier
access to commercial financing. Technical assistance from the Bank can help build up
countries’ long term institutional and technical capacity to manage oil and mineral resources,
and the related social and environmental impacts. The Angola Interim Strategy Note (ISN)
for instance outlines the Bank’s engagement with the government in policy dialogue and
non-lending technical assistance in the petroleum sector. Technical assistance can also help
improve transparency, promote private sector investment and generally improve the
contribution of the mineral sector to the country’s economic development and poverty
 - 15 -

reduction. In Ghana, the Bank is providing technical assistance to review and upgrade the
current framework for investment appraisal and PPPs, to ensure that Government resources
are deployed in an optimal manner to maximize economic benefits. The Bank’s involvement
in the Extractive Industries Transparency Initiative (EITI), and encouraging countries to join
EITI can also help ensure that wealth generated from natural resources contributes to a
country’s economic development by providing a framework for improved accountability and
transparency of natural resource revenues.

56. A close dialogue with the borrower ahead of the borrowing in question helps
reduce the time needed for assessing cases of non-concessional borrowing. From the
initial indications from borrowing countries of the intention to borrow, or from the first
media report of such borrowing, staff need to take on a significant degree of due diligence in
interacting with the government to collect data on the project involved, and to analyze the
nature and benefits of the borrowing in question. Once a draft is ready for discussion, the
NCBP committee discusses the case, and the document is revised to reflect the NCBP
discussion and recommendation before the Operations Committee makes a decision on the
IDA response. The process tends to be time consuming and staff resource intensive. A close
dialog with the country and an early sharing of information help facilitate a more efficient
and more informed response.

57. Availability of sector plans and feasibility studies including least cost solutions
helps to make informed assessments. The cost benefit analyses need to take into account a
certain degree of uncertainty in the rates of return calculations for the projects being
financed, but with reasonable assumptions they provide some comfort about the benefit of a
proposed project. The cases of Mali and Ghana for instance produced calculations of internal
rates of return in the power sector, while acknowledging that the results can vary
substantively depending upon assumptions.22 However, insufficient information on projects
to be financed with non-concessional borrowing hampers the ability to assess rates of return
and make a case for an exception.

58. While IDA generally has responded to non-concessional borrowing after the
borrowing has taken place, providing a preliminary upstream decision on the Bank’s
response to a borrowing plan affords more opportunities to work with the client to
assess the benefits and risks of the envisioned borrowing. Although IDA does not set
non-zero ceilings for non-concessional borrowing (like the IMF), a borrowing country could
request a preliminary determination of IDA’s response under the NCBP as long as there is
sufficient information on the nature and terms of the financing. IDA would look at the same
elements identified in Box 3 of the NCBP paper (reproduced in Annex 3) in making its
preliminary determination. With sufficient information upfront, this determination would in
most cases hold once the final loan contract is signed, unless significant changes are made.

59. Ghana is an example of a country that had engaged with Bank staff regarding
their commercial borrowing plans quite far ahead of the actual borrowing. This
22
Among the assumptions that need to be made in power sector projects are: the rate of growth of
electricity consumption; timing and assumed capacity of other projects in the pipeline; value of the
energy generated with the new investment; assumptions regarding future tariff rates, assumptions
regarding the price of oil, and assumptions about the hydrological risks.
 - 16 -

afforded opportunities to staff to discuss alternative options for the country to consider,
including enclave borrowing. It also started a dialogue with Ghana on project evaluation,
and encouraged the Government to increase its debt management capacity. Even in cases
where the Bank’s assessment is not to provide an exemption to the policy, a preliminary
upstream decision would give certainty to the client regarding the potential impact of the
borrowing on their IDA allocations. This will also provide greater incentive for countries to
report up-front their borrowing plans, and reduce the need for an IDA response ex-post. For
strong performers, this would also be consistent with a gradual move in the direction of
increased creditworthiness for post-MDRI countries at low risk of debt distress. This
element of the policy is elaborated in Annex 4.

60. Finally, further discussions are needed particularly with a few remaining
multilateral creditors, private creditors and non-OECD bilateral creditors. The DSF is
a useful platform, along with the NCBP to further reach out to these creditors to encourage
them to increase the concessionality of their lending in line with the DSF. A number of small
cases of non-concessional borrowing come onto the radar screen of staff on an ongoing basis.
Large framework agreements for public and publicly-guaranteed are reportedly being signed
in select African LICs with non-OECD bilateral creditors, but staff generally has insufficient
information on the terms and conditions (and status) of these agreements to be able to make a
definitive assessment of concessionality. Country teams continue to have discussions on
these agreements with the relevant governments.

VI. Next Steps

61. Given the new landscape in many LICs post-MDRI, the Bank and IMF will
continue their efforts in extending creditor collaboration to bilateral creditors, in
particular non-traditional creditors. As such the Bank will continue to pursue close
collaboration with non-OECD bilateral creditors, and help to find ways to enhance South-
South collaboration that leads to sustainable outcomes. The Bank will also continue to seek
opportunities to reach out to the few remaining multilateral creditors that continue to provide
non-concessional lending to grant-eligible LICs and post-MDRI countries. Finally
opportunities to enhance the dialogue with commercial creditors will continue to be pursued,
building on the dialogue already established.

62. The Bank and IMF will also follow through on the work program of DSF
training, debt management capacity building and developing medium-term debt
management strategies. This work is a natural complement to the creditor outreach
program, and vital to ensuring that countries make informed decisions on the impact of
borrowing plans on debt sustainability. Given the tradeoffs between financing development
priorities and maintaining debt sustainability in countries where concessional financing is
constrained, the DSF provides borrowers with important information on the potential impact
of any envisaged non-concessional borrowing on debt sustainability.

63. To improve the effectiveness of IDA’s ability to engage countries contemplating

non-concessional borrowing, IDA is prepared to be involved early on in helping
countries to assess investment projects for their returns to investment. IDA’s significant
sectoral experience and ongoing dialogue on the macroeconomic and growth strategy in most
 - 17 -

LICs, places IDA well as a partner in helping countries ensure that any new borrowing for
which concessional financing is not available, will generate sufficient returns to be able to
finance the borrowing. At the request of a country, the Bank can make a preliminary
assessment on the basis of draft loan agreements, and thereby provide borrowers greater
certainty of the Bank’s response. This helps to reinforce the primary role of the NCBP i.e.,
the prevention of a rapid reaccumulation of unsustainable debt while enabling a country to
gradually access additional financing where this is appropriate.

64. At the country level this requires a continued close collaboration with the IMF
staff when setting non-zero ceilings for non-concessional borrowing. Particularly for
countries with PRGF arrangements, IMF staff usually consults Bank staff when countries
request a non-zero ceiling for non-concessional borrowing for a particular purpose. There is
a good basis for close coordination as both the IMF's concessionality policy and the NCBP
use the same definitions of grant element, and have a harmonized approach to assessing the
level of integration of financing packages. Early involvement with the Fund and thorough
analysis of the merits of planned investments when non-zero ceilings for non-concessional
borrowing are determined help ensure a coordinated approach to concessionality. This also
minimizes the need for a time-consuming review process after borrowing has taken place.
 - 18 -

Annex 1: Grant Eligible and Post-MDRI Countries to which the Non-Concessional Borrowing Policy applies in FY09 1/2/

Red light (26) Yellow light (14) MDRI recipient and Green light
(9)
Afghanistan Haiti Benin 3/ Cameroon
Burundi Lao People's Democratic Republic Bhutan Ghana
Central African Republic Liberia Burkina Faso 3/ Madagascar
Chad Myanmar 4/ Cambodia Mali
Comoros Rwanda 3/ Ethiopia 3/ Mozambique
Congo, Democratic Republic of Sao Tome and Principe 3/ Guyana 3/ Senegal
Congo, Republic of Solomon Islands Kyrgyz Republic Tanzania
Cote d'Ivoire Somalia 4/ Lesotho Uganda
Djibouti Sudan 4/ Malawi 3/ Zambia
Eritrea Tajikistan Mauritania 3/
Gambia, The 3/ Togo Nepal
Guinea Tonga Nicaragua 3/
Guinea-Bissau Yemen, Republic of Niger 3/
Sierra Leone 3/

1/ This list is updated annually and subject to change should other IDA-only countries qualify for IDA grants and/or MDRI. It includes all IDA-only
countries which are currently eligible for IDA grants on debt-sustainability grounds, as well as post-MDRI green light countries. It excludes "gap"
or "blend" countries which receive hardened or blend terms from IDA and are not eligible for IDA grants. Should a country's IDA-only status
change mid-year, the list would be updated at that time to reflect the change.
2/ Timor-Leste is also subject to the policy given its eligibility for exceptional grants.
3/ HIPC Completion Point Country which has also qualified for debt relief under the MDRI.
4/ Inactive country in FY09. The traffic light shall be reassessed at the respective reengaging point based on debt sustainability.
 - 19 -

Annex 2. List of Low-Income Countries Subject to the Non-Concessional Borrow ing Policy of the IMF and/or IDA
Last update: May 5th, 2008

Minimum Minimum Minimum

IMF and IDA IMF-only IDA-only
grant element grant element grant element
(in percent) (in percent) (in percent)

Afghanista n 60 Albania 35 Bhutan 35

Benin 35 Armenia 35 Burundi 35
Burkina Faso 35 Cape Verde 35 Cambodia 35
Cameroon 35 Grenada 35 Comoros 35
Central African Republic 50 Honduras 35 Congo, Democratic Republic of 35
Chad 35 Moldova 35 Djibouti 35
Congo, Republic of 50 Eritrea 35
Cote d'Ivoire 35 Ethiopia 35
Gambia, The 45 Ghana 35
Guinea 35 Guyana 35
Guinea Bissau 50 Lao People's Democratic Republic 35
Haiti 35 Lesotho 35
Kyrgyz Republic 45 Mali 35
2/
Liberia 100 Mongolia 35
1/
Madagascar 35 Myanmar 35
Malawi 35 Nepal 35
1/
Mauritania 35 Somalia 35
Mozambique 35 Solomon Islands 35
1/
Nicaragua 35 Sudan 35
Niger 50 Tajikistan 35
Rwanda 50 Timor-Leste 35
Sao Tome and Principe 50 Tonga 35
Senegal 35 Yemen, Republic of 35
Sierra Leone 35 Zambia 35
Tanzania 35
3/
Togo 35
Uganda 35

Numbe r of countries 27 Number of countries 6 Number of countries 24

1/
Inactive countries, which would be subject to the non-concessional borrowing policy upon becoming active.
2/
The program does not envisage any external borrowing.
3/
A PRGF arrangement was approved on April 23, 2008.
 - 20 -

Annex 3
23
Principles that would guide exceptions to non-concessional borrowing ceilings

The concessionality benchmark proposed for the purposes of identifying breaches of the Non-
concessional Borrowing Policy (NCBP) has been a proven benchmark in PRGF programs, and has
served as a useful tool in that context to provide the borrower some “leverage” with the creditor in
obtaining the best possible financing for a potential investment. PRGF programs normally contain a
zero ceiling on allowable non-concessional borrowing in countries, and in exceptional cases PRGF
programs may define a non-zero ceiling on non-concessional borrowing to accommodate a specific
non-concessional loan.

Similar to considerations that feed into decisions on non-concessional borrowing limits in the PRGF, a
number of country-specific and loan-specific factors would be taken into account in the NCBP to
assess whether an exception to the zero-ceiling using the proposed benchmark is warranted. Although
many proposed loans may have merit on specific economic or financial terms, the country
environment in which they occur will strongly influence actual outcomes. There should be a favorable
assessment at both the country-specific level and the loan-specific level to warrant an exception.

Country-specific:

• Overall borrowing plans of the country. A modest level of overall borrowing by the
country on the basis of the DSA to accommodate a particular investment may warrant
consideration. For such a consideration, clear reporting of overall borrowing plans is needed,
and enhanced creditor coordination through the DSF would facilitate this possibility.
• Impact of borrowing on the macroeconomic framework. Whether or not the borrowing
would have a deleterious effect on the macroeconomic framework would influence the
consideration of an exception.
• Impact on the risk of debt distress. The current risk classification and whether or not the
loan is likely to lead to a higher risk of debt distress will be a key consideration. Given their
lower-risk of debt distress, and generally better performance, more flexibility is envisaged for
“green light” countries. In addition, “yellow light” countries could benefit from somewhat
greater (although still exceptional) flexibility than “red light” ones.
• Strength of policies and institutions, especially public expenditure management and debt
management. As the fiscal space Board paper makes clear, policies and institutions in
particular those governing the efficiency of public investment are critical.1 Without these,
even high return projects may fail to meet objectives.

Loan-specific:
• Development content and potential impact of the loan, i.e., investment will unlock a proven
bottleneck to development as determined by analytical work such as a PER.
• Estimated economic, financial and social returns to investment of the project, weighted by the
probability that the project will succeed.
• Lender equity stake in the project.
• No additional costs associated with the loan, i.e., collateralization, hidden costs.
• No other sources of more concessional financing are available.
• Concessionality of the overall financing package for a particular investment.
1/ See World Bank (2006). “Fiscal Policy for Growth and Development: An Interim Report”, DC2006-
0003, April 6.

23
Based on IDA (2006), Op. cit. Box 3.
 - 21 -

Annex 4: Elaboration of Select Elements of the NCBP

Defining public enterprises

1. While the June 2006 paper outlined that concessionality requirements would
apply to all external public and publicly-guaranteed debt (PPG), it did not include an
explicit definition of public enterprise. Staff has been using the same definition of PPG
external debt as the DSF framework. According to the DSF framework, public and publicly
guaranteed (PPG) external debt comprises (1) “External debt of the public sector, defined as
central, regional and local government and public enterprises. Public enterprises subsume all
enterprises of which the government owns 50 percent or more”, and (2) “Public sector-
guaranteed private sector debt”. The Manual for the Debtor Reporting System further
describes public enterprises as “Autonomous institutions such as financial and non-financial
corporations, commercial and development banks, railways, utilities, etc. where (i) the
budget of the institution is subject to the approval of the government of the reporting country;
or (ii) the government owns more than 50% of the voting stock or more than half of the
members of the board of directors are government representatives; or (iii) in case of default,
the state would become liable for the debt of the institution.”

2. The definitions of public and publicly-guaranteed debt and public enterprises in

the LIC framework and the DRS have been used in practice for the purpose of setting
the parameters of IDA’s concessionality requirements. In general, where queries about a
borrower’s status as a public enterprise have been received, the LIC definition, supplemented
where necessary by the DRS definition guided the determination of whether the enterprise in
question is considered a public enterprise for the purpose of the NCBP. Other elements that
guide the decision include, whether the entity is run at arm's length as a commercial company
by foreign or private management, whether it is financially self supporting and whether it
generates substantial revenues in hard currency. In all cases, if a direct government
guarantee is provided for external lending to such an entity, the loan would be considered
publicly-guaranteed.

3. Should an IMF arrangement define exceptions to its concessionality

requirements for a certain public enterprise in a country, the Bank would exempt that
enterprise from the NCBP as well. The IMF may set out specific exceptions to their zero
ceilings on non-concessional borrowing through a Technical Memorandum of Understanding
(TMU), which accompanies IMF arrangements negotiated with a country. In the TMU a
public enterprise may also be exempt from concessionality requirements on a case-by-case
basis. Since these exceptions may be in response to a particular need for borrowing at a
given point in time, the Bank would exempt that enterprise from the NCBP as long as the
TMU providing the exemption remains in effect.

Integrated Financing Packages

4. In the context of the NCBP, questions have been raised regarding the possibility
of measuring concessionality at the level of the overall financing package rather than at
the loan-by-loan level. While the non-concessional borrowing policy generally assesses
concessionality on a loan-by-loan basis, the policy paper mentions that "Whenever warranted
 - 22 -

in terms of a case-by-case analysis, the relevant measure could be ....the overall

concessionality of a financing package for a particular investment, rather than the grant
element of each individual loan provided for that particular investment."24 As a result, in a
number of cases the overall concessionality of integrated financing packages for particular
projects has been used for the purpose of the NCBP. A number of recent inquiries by
creditors to the LendingToLICs@worldbank.org mailbox have requested clarification of this
policy.

5. As described in the main paper, the NCBP adopts the same methodology as the
IMF to determine whether a financing package can be considered integrated, for the
purposes of measuring overall concessionality. If the IMF has an active program in place,
the Bank would continue to rely on the IMF to make a determination of whether the
financing package is sufficiently integrated. If the IMF does not have an active program in
the country concerned then the Bank would make its own determination regarding the
integrated nature of a financing package. A preliminary assessment can usually be made
based on draft agreements, but a final decision would require copies of the final contracts.
Hence where an IMF-supported arrangement is not in place, countries would need to agree to
share the draft agreements and final contracts with Bank staff when they request the Bank to
assess the integrated nature of a financing package.

6. Where IDA is involved in a financing package that includes other donors and
creditors, this same definition of an integrated financing package would be used. In two
recent projects, a multilateral creditor whose terms are non-concessional, is being requested
by Governments to fill project financing gaps along with concessional partners including
IDA and the AfDF. Allowing a non-concessional lender to co-finance a project with IDA in
a country that is subject to IDA's non-concessional borrowing policy may lead to the possible
perception of preferential treatment of that non-concessional creditor. For such cases, and
particularly where IDA grants may be involved, the clear and transparent methodology as
described above would help reduce any perception of a conflict of interest for the Bank.

7. At the same time, a decision on an integrated financing package that includes

IDA as a creditor is subject to a somewhat more stringent approval process. In general,
if the country has an IMF program in place with concessionality requirements, then again the
Bank would rely on the IMF’s determination of whether the financing package is integrated.
In the absence of an existing IMF arrangement in the country where the determination is
sought, then the Bank would make a determination based on the criteria described above.
The decision would be made by the NCBP committee via a virtual review. To avoid the
perception of conflict of interest, the region proposing the integrated package would recuse
itself from the NCBP committee's decision.

24
See IDA, “IDA Countries and Non-Concessional Debt: Dealing with the ‘Free Rider’ Problem in IDA14
Grant Recipient and Post-MDRI Countries.” IDA/R2006-0137, June 2006, paragraph 27.
 - 23 -

Upstream determinations of IDA’s response under the NCBP

8. IDA generally has responded to non-concessional borrowing ex-post, on a case-

by-case basis. Box 3 of the NCBP paper is reproduced in Annex 3, and outlines the country-
specific and loan-specific elements that are taken into consideration when determining the
appropriate IDA response, including the possibility for an exception to the policy. At the
country-specific level, these elements include the overall borrowing plans of the country, the
impact of the borrowing on the macroeconomic framework, the impact of the borrowing on
the risk of debt distress, and the strength of policies and institutions, particularly in the area
of public expenditure and debt management. At the loan specific level the elements include
the development content and potential impact of the loan, the economic and financial returns
to the project along with risk factors, the lender equity stake, additional costs associated with
the loan, access to concessional financing and overall concessionality.

9. Unlike IDA, the IMF can include non-zero limits on non-concessional borrowing
in some IMF-supported arrangements. This enables the country to incur some new debts
up to a specified ceiling which do not meet the minimum grant element requirement set out
in the program. In general the specific borrowing that would take place under these non-zero
limits is pre-identified by countries during discussions with IMF staff at the time of
negotiating the PRGF arrangement. It is then the responsibility of the borrower to ensure that
the projects funded under the non-zero limits do not breach the ceilings established. Once
non-zero limits are established under an IMF arrangement, the IMF does not assess the
specific projects funded under these limits.

10. Although IDA does not set non-zero ceilings for non-concessional borrowing, a
borrowing country can in principle request an upstream determination of IDA’s
response under the NCBP as long as there is sufficient information on the nature and
terms of the financing. Where an IMF arrangement is in place and a non-zero ceiling has
been negotiated under this arrangement, then IDA could agree to also exempt the country
from concessionality requirements under the NCBP up to the ceiling limits.25 This would be
consistent with a gradual move in the direction of increased creditworthiness for post-MDRI
countries at low risk of debt distress. However, for countries without an IMF arrangement in
place, the country could also request an upstream preliminary determination of the IDA
response based on the same criteria used for the ex-post assessments. An upstream
determination would need sufficient information to assess the country-specific and loan-
specific elements outlined in Annex 3. Once all the relevant information is available, the
Bank could provide a preliminary assessment until the actual loan contracts are signed and
shared with IDA staff.

25
On a case-by-case basis, based on an assessment by the Bank.
 - 24 -

Annex 5: Concessionality and Calculation of Grant Element under the NCBP

Concessionality is a measurement of the “softness” (or grant element) of a credit, reflecting that the credit is
extended at terms below market terms. A grant has 100 percent concessionality. For a credit, concessionality is
the difference between the nominal value of the credit and the present value of the debt service as of the date of
disbursement, expressed as a percentage of the nominal value. Whether a loan/credit is concessional or not
depends on the minimum concessionality level set out. The Development Assistance Committee (DAC) of the
OECD first introduced the concept and defined concessional credits as those with 25 percent or more grant
element calculated at the discount rate of 10 percent. To date, the OECD uses this definition to determine
official development aid.

The concept of the minimum concessionality level has evolved, and a loan is now typically considered
concessional if it contains a minimum grant element of at least 35 percent. In the mid-1990s the OECD
export credit agencies refined their concessionality definition for export credits. The “Arrangement” set out the
minimum concessionality at a grant element of 35 percent (and at 50 percent if the beneficiary country is a least
developed country), calculated using a discount rate applicable to the currency of the transaction (i.e. a
currency-specific commercial interest reference rate, CIRR). For operational purposes, the IMF employs a
methodology similar to the OECD export credit Arrangement in calculating the appropriate level of
concessionality in relation to its performance criteria under IMF-supported arrangements.

IDA’s NCBP has harmonized with the IMF definition of concessionality. The minimum grant element
required for a loan to be considered concessional under the NCBP is 35 percent, or higher should a higher
minimum level be required under an existing IMF arrangement. The concessionality level under the NCBP is
calculated using the following parameters:

(i) The discount rate is the relevant CIRR + margin, as follows:

The length of maturity Margin Relevant CIRR
Less than 15 years 0.75 6-month average
From 15 years up to but not including 20 years 1.00 ten-year average
From 20 years up to but not including 30 years 1.15 ten-year average
From 30 years and above 1.25 ten-year average
(ii) The discount rate of a given loan is the rate in effect at the time of notification.
(iii) The calculation uses the face value of the loan, including both the disbursed and disbursed amounts.
(iv) The overall concessionality level of a financing package is determined by multiplying the nominal value of
each component of the package by the respective concessionality level of each component, summing the results,
and then dividing the sum by the aggregate nominal value of the components.
(More details on the calculation of the concessionality and a tool to calculate concessionality are available at
http://siteresources.worldbank.org/IDA/Resources/GrantElementCalculator.htm).

The IMF and NCBP calculation of concessionality level differs in two respects relative to the OECD
Arrangement. First the OECD takes six-month average CIRRs, as in general export credits carry a maturity of
less than 15 years, while the IMF and IDA’s NCBP uses six-month average CIRRs for a loan with a maturity of
less than 15 years and ten-year average CIRRs for a loans with a maturity of 15 years or longer. Second, when
calculating the concessionality level of a bilateral loan, the IMF (and IDA’s NCBP) uses the face value of the
loan instead of using the nominal value of the debt (i.e., including both the disbursed and undisbursed amounts).

Sources:
1/ Glossary of Key Terms and Concepts. From the "Development Co-operation Report: Efforts and Policies of
Members of the Development Assistance Committee".
2/ IMF, 2003, External Debt Statistics: Guide for Compilers and Users – Appendix III, Glossary, IMF,
Washington DC.
3/ Dipplelsmann, R. and A. Kitili (2004), “Concessional Debt,” IMF Committee on Balance of Payments
Statistics, Balance of Payments Technical Expert Group, Issues Paper No.29, p. 3.