Table 5: Uses of IBRD Net Income, FY 1995-7 FY 1995 FY 1996 FY 1997 Net income $1,354m $1,187m $1,285m
IDA $300m $250m $600m
IDA Debt Reduction Facility 0 $100m 0
Trust Fund for Gaza/West Bank 0 $90m $90m
Emergency Assistance for Rwanda $20m 0 0
Trust Fund for Bosnia/Hercegovina 0 $150m 0
HIPC Debt Initiative Trust Fund 0 0 $500m
Total $320m $590m $1,190m Residual $1,034m $597m $95
Sources: World Bank (1996, p170); World Bank (1997d, p188).
Similarly, the very low interest rates currently charged on ESAF and IDA loans (½% PA in both cases) severely limits the scope for increasing concessionality by lowering them further32. Moreover, these rates only cover the Bank and Fund’s administrative costs of arranging the loans.
A potentially more fruitful option would be to lengthen the grace and repayment periods:
extending the grace period of IDA credits from five years to ten years, and allowing interest payments to be capitalised (ie added on to the loan rather than paid) during this period would reduce the present value of a $100m loan from $40m to $32m;
extending the total repayment period from 40 to 50 years as well would reduce the present value further to $27m;
doubling the repayment period of ESAF loans (to 20 years, including 10 years' grace period) would reduce the present value of a $100m loan from $66m to $46m.
However, increasing concessionality would not be costless. Debt-service payments on IDA credits (IDA reflows) are used to finance new IDA credits, implying that fewer resources would be available from this source to re-lend in the future. Also, some IDA credits are used to refinance non-concessional IBRD debts held by low-income countries - a significant element of the debt strategy for some highly-indebted poor countries. However, since only new credits would be subject to the new terms, the effect on IDA reflows would materialise relatively slowly, which should allow the refinancing of IBRD loans to continue until they had been fully repaid.
While the sacrifice of future lending for increased concessionality might well be worthwhile overall, it is difficult to argue that IDA credits are generally (let alone universally) too expensive. It is therefore probably more realistic to argue for more concessional terms in specific circumstances where there is a particular case for greater concessionality, because of a country's solvency situation, its liquidity situation during the extended grace period, or the nature of the project to be supported (see Box 1).
Such circumstances might include, for example:
credits to the poorest low-income countries;
credits to other low-income countries which already have unsustainable debt burdens;
support for projects and programmes where the foreign exchange benefits are indirect or slow to materialise, particularly in the social sectors (eg health, education, safety net programmes, etc).
BOX 1: Liquidity and Solvency
There is an important distinction between two different types of financial problem which may be faced by developing countries: liquidity problems and solvency problems.
A liquidity problem arises when a country does not have enough foreign exchange to meet the debt-service payments and other obligations due at a particular point in time, although it would ultimately be able to meet all its obligations if they were delayed long enough. This generally arises when creditors are unwilling to lend, for example because of a loss of confidence, even though the country would be able to service the loans. If a country has a liquidity problem, its main need is for more foreign exchange going into the economy, to meet its immediate obligations. There may be a limit to the terms of the new loans it can afford; but this is a secondary consideration.
A solvency problem arises when a country would never be able to meet all its obligations, however long they were delayed. Even if creditors are willing to defer the country's obligations, or lend more money to finance them, the obligation in the future would increase. Insolvency problems can only be tackled by cancelling existing obligations (eg through debt cancellation), or by improving their terms either directly (eg by lowering interest rates or by deferring obligations at interest rates well below the market rate) or indirectly (eg by providing grants or highly concessional loans to meet the obligations).
The precedent for extending the terms of ESAF loans has been established by the HIPC Initiative (see below). However, the additional cost of providing greater concessionality on ESAF loans more generally would need to be met from the interest subsidy accounts33. This implies that any increase in concessionality would require either more donations to these accounts or a reduction in the volume of lending (so that the same amount of subsidy could be spread more thickly).
Any increase in the subsidy account would almost certainly come from bilateral aid budgets, and thus reduce bilateral flows to low-income countries. In principle, the IMF could contribute from its own resources, including sales of its gold reserves, but this is unlikely and probably less desirable than using the available resources to finance the HIPC Initiative (see below).
The cost of doubling the maturity of ESAF loans would be $20m per $100m of loans affected (the difference between the present value before and after the change). This suggests two options: either this cost could be met by diverting $20m of bilateral aid into the ESAF subsidy account or the total subsidy could be reduced back to its original level by reducing the level of ESAF loans by about 40%.
Either of these options would have a significant effect on the liquidity position of low-income countries. In the former case, this would probably occur at the beginning of the process, as bilateral aid flows were reduced so that the money could be paid into the ESAF subsidy accounts. In the latter case, it would be spread over the period for which the ESAF remained in operation, which would be substantially longer. In either case, the effect would be a substantial short-term cost to low-income countries, to be off-set by savings in debt-service payments later. It is far from clear that the benefits would necessarily justify the costs. Moreover, policy conditions attached to IMF loans make them less attractive than bilateral loans or grants.