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Concessionality and the Calculation of the Grant Element of External Debt under a Fund-Supported Program

Last Updated: May 20, 2008

Fund-supported programs generally include limits on nonconcessional external debt. This page explains the concessionality concept used by the Fund, provides a concessionality calculator1 that allows the calculation of the grant element for a broad range of financing financing instruments, and explains under which circumstances related financial instruments (i.e., a "financing package") can be assessed jointly, rather than separately, for the purpose of assessing the concessionality requirements.

Concessionality concept used by the Fund

The limits on nonconcessional external debt in Fund-supported programs apply to public and publicly guaranteed debt. Public enterprises that are not covered under the definition of government are not subject to the debt limits. Debt limits are included in all upper-credit-tranche arrangements (access to fund credit above 25 percent of quota) to (i) prevent the build-up of external debt during the period of the Fund arrangement to levels that may lead to debt-servicing problems in the medium term; (ii) ensure that restraint on domestic demand is not threatened by unanticipated recourse to external financing; and (iii) limit a member's external vulnerability.

The concept of concessionality was first introduced in 1969 by the Development Assistance Committee (DAC) of the OECD. It entailed a minimum 25 percent grant element calculated on the basis of a flat 10 percent discount rate. That definition is still used by the OECD for ODA. Over time the OECD refined the definition of concessionality for export credits. The minimum grant element was gradually raised to 35 percent (50 percent for the least developed countries), while discount rates calculated on the basis of currency-specific commercial interest reference rates (CIRRs) replaced the 10 percent rate. A margin is added to the CIRR to reflect the maturity of the loan. This definition, which reflects more accurately the opportunity costs to lenders, has been in place since 1996.

For operational purposes, the Fund uses a definition of concessionality that is similar to that used by the OECD for export credits. To be deemed concessional in Fund arrangements, loans should generally have a minimum grant element of 35 percent, calculated on the basis of the CIRRs published by the OECD. The only difference between the definitions used by the Fund and the OECD is that the Fund uses ten-year average CIRRs to assess the concessionality of loans with a maturity of at least 15 years, and six-month average CIRRs for loans with a shorter maturity, while the OECD only uses six-month average CIRRs, as export credits usually have a maturity of less than 15 years. In some Fund arrangements, the minimum grant element is higher than 35 percent. IDA uses the same definition of concessionality as the Fund in the context of its policy on nonconcessional borrowing.

Concessionality calculation

The grant element measures the concessionality of a loan. It is defined as the difference between its nominal value (face value) and the sum of the discounted future debt-service payments (net present value) to be made by the borrower, expressed as a percentage of the face value of the loan:

formula

Whenever the interest rate charged for a loan is lower than the market-related discount rate, the resulting present value of the debt is smaller than its face value, with the difference reflecting the grant element of the loan.

The concessionality calculator posted on this website takes into account commissions and fees as well as alternative standard repayment profiles (equal principal payments, annuity-based principal payments, lump-sum principal and interest payment at maturity, and a customizable schedule). It can also calculate the grant element for packages that combine a grant with a nonconcessional loan.

Assessing financing packages

Concessionality, as discussed above, is normally determined on a debt-by-debt basis. However, the Fund may assess on a case-specific basis whether an envisaged combination of financing instruments can be treated as a package for purposes of meeting concessionality requirements. A number of elements are taken into consideration for this determination. The list below illustrates several of the most important such elements. None of these elements alone is determinative, but packages meeting a number of these elements would tend to show a greater degree of relatedness, supporting a determination of an integrated incurrence of debt:

  • Identical intended use or purposes for the financing;
  • Inter-related schedules for disbursement;
  • Cross-conditions for:
    • entry into legal effect (for example, whether the contracting or guaranteeing of the debt is conditional upon the provision of the grant);
    • availability of funds (for example, whether the availability of loan disbursements is contingent on release of scheduled grant disbursements); and
    • default (for example, whether default in one of the contracts is considered default on other contracts); and
  • Identical parties to the financing.

To the extent that relevant documentation is available, Fund staff may provide an advance and preliminary finding as to whether a prospective financing package may be treated as an integrated incurrence of debt. However, Fund staff is not in a position to advise members in structuring borrowing packages for the purposes of meeting conditionality under Fund arrangements (or, indeed, for any other purpose).In any case, given that conditionality against nonconcessional external debt would only be implicated upon the actual contracting or guaranteeing of such debt, a final determination can only be provided upon a review of the signed contracts.

Once the components have been determined to constitute an integrated package of debt, the overall concessionality of the package is calculated using the weighted average of the grant elements of its various components. 2 If, however, the financing package is not found to be integrated, the concessionality of each element of the package will be assessed individually.

1

The calculator on this website is provided for general information purposes only. Calculations derived from use of this calculator do not constitute, and should not be deemed to constitute, an official interpretation or application of the IMF/s decisions and policies nor do they bind the IMF with regard to the matters presented. The IMF does not make any express or implied representations or warranties of any kind with respect to the use of this calculator.
2 The weights are based on the nominal value of the loans and grants that comprise the financing package.