## POVERTY REDUCTION AND GROWTH TRUST—REVIEW OF INTEREST RATE STRUCTURE ## Source details **Canonical URL:** [POVERTY REDUCTION AND GROWTH TRUST—REVIEW OF INTEREST RATE STRUCTURE](https://www.imf.org/-/media/files/publications/pp/2019/ppea2019023.pdf) ## Other formats - [Markdown version](/-/media/files/publications/pp/2019/ppea2019023.pdf.md) - [Structured JSON version](/-/media/files/publications/pp/2019/ppea2019023.pdf.json) --- ### Executive summary - This paper reviews the PRGT interest rate structure for the period July 2019–June 2021. - Applying the PRGT’s existing interest rate setting mechanism, as modified in 2016, would result in: - zero rate for the Extended Credit Facility (ECF), - a rate of 0.25 percent for the Standby Credit Facility (SCF), - and a zero rate for the Rapid Credit Facility (RCF). - Staff proposal to align interest rates on the SCF with those on the ECF as part of the Review of LIC Facilities: - would modestly increase concessionality and incur moderate subsidy costs that can be financed within the PRGT’s self-sustained financing envelope in the context of the full reform package. - Based on the average SDR rate over the most recently observed 12-month period, the proposed revised interest rate mechanism would result in: - zero interest rates on both ECF and SCF credit for the period July 2019–June 2021, - interest on RCF credit remaining permanently at zero, as decided in 2015. - Staff proposes to waive interest rate charges on legacy balances under the Exogenous Shocks Facility (ESF) until all outstanding credit is fully repaid or until the time of the next review, which should take place no later than June 2021. - Earlier text notes Directors supported waiving interest rate charges on outstanding legacy credit under the ESF until November 2020, by which time all ESF credit is scheduled to be fully repaid, or until the time of the next review. ### Background and mechanism design - Objectives of the 2009 PRGT interest rate mechanism: - increase concessionality of PRGT financing, - preserve Trust resources, - avoid permanently zero interest rates, - tailor terms to LICs’ needs and capacity, - limit fluctuations in concessionality and subsidy costs. - Key features: - Interest rates set for upcoming two years in biennial reviews. - Levels linked to the average SDR interest rate over the most recently observed 12-month period. - Prior design set SCF rate at 25 basis points above ECF. - Timeline of major modifications: - Temporary waiver of interest payments on outstanding concessional loans: effective January 7, 2010 and extended through end-December 2016. - July 2015: RCF interest rate set permanently at zero. - October 2016: mechanism amended to set both ECF and SCF to zero when average SDR rate ≤ 0.75 percent; ESF legacy balances’ interest charges waived until December 2018. - December 4, 2018: postponement of the next interest rate review to no later than June 30, 2019; existing zero percent interest rates on ECF and SCF continued through June 30, 2019; ESF legacy waiver extended by six months. ### PRGT interest rates in the current economic context (selected findings and statistics) - SDR interest rate evolution: - SDR rate declined to 0.05 percent in September 2014 and remained until September 2016; rose to reach 1.14 percent by end-March 2019. - Applying current mechanism (with 12-month average SDR rate above 0.75 percent) would yield: - SCF interest rate of 0.25 percent (outstanding SCF credit: SDR 264 million as of end-March 2019), - zero rate for most PRGT borrowers including outstanding ECF and RCF credit. - PRGT credit outstanding, as of end-March 2019 (in millions of SDRs): - ECF: 5,561 - RCF: 375 - SCF: 264 - ESF: 128 - Interest savings from temporary waivers and 2016 modification: estimated at SDR 23.3 million for January 2010–June 2019 (benefiting 20 member countries). - Degree of concessionality: - Average grant element in PRGT loans currently estimated to be below 30 percent, compared with a traditional benchmark of 35 percent. - Global and LIC outlook: - Global growth expected to slow to 3.3 percent in 2019. - Low-income countries face significant risks: volatile external conditions, tightening external financing conditions, climate change and natural disasters, trade tensions, subdued commodity prices, and rapidly increased public debt stocks. ### Proposed modifications and implications - Proposal: align SCF rate structure with ECF (referenced Tables in paper). - Under alignment: - SCF rate set at zero when the SDR rate is below 2 percent, - SCF rate reduced by 0.25 percent when SDR rate is above 2 percent (relative to prior SCF settings). - Implications: - Makes SCF more concessional. - Modest subsidy costs expected; staff notes these can be financed within PRGT’s self-sustained financing envelope when considered with the full LIC Facilities reform package. - Would delay the first adjustment in the interest rate on the SCF until average SDR rate exceeds 2 percent. ### Rationale and expected effects - The proposed modification preserves the fundamental logic of the PRGT interest rate mechanism while making it more concessional. - Expected effects: - Lowers average concessionality gap of the SCF toward intentions of the 2009 reforms, which did not anticipate prolonged very low global rates. - Maintains tailoring via the SCF’s somewhat shorter maturity and shorter period before repayments begin. - Increases similarity to GRA financing terms where SBA and EFF loans carry the same basic rate but different repayment periods. - Preserves link to world interest rates, allowing for non-zero rates and limiting fluctuations in concessionality and subsidy costs. ### Proposed interest rate mechanism (key parameters) - SDR rate: Average SDR interest rate over the most recently observed 12-month period. - RCF rate: Rate set permanently to zero as of July 2015. - Table of rates (In percent): - If SDR rate < 2: ECF/SCF = 0.00; RCF = 0.00 - If 2 ≤ SDR rate ≤ 5: ECF/SCF = 0.25; RCF = 0.00 - If SDR rate > 5: ECF/SCF = 0.50; RCF = 0.00 ### Subsidy costs and financing implications - Direct cost estimates: - Costs for existing stock of outstanding SCF credit: SDR 1.8 million. - Steady state, assuming higher usage of SCF after reforms: alignment would cost about SDR 4.9 million annually. - Alignment would lower PRGT’s self-sustained capacity by about SDR 0.03 billion. - Financing: - These subsidy costs, together with net costs of access increase and other reforms, can be accommodated under the self-sustained PRGT while maintaining the self-sustained lending capacity target of SDR 1¼ billion. - Risk assessment: - Risks are evenly balanced over the coming decade though the longer-term outlook is subject to greater uncertainty. ### Legacy ESF credit: waiver proposal and outstanding amounts - Case for waiving interest rate on legacy ESF credit until all outstanding balances are fully repaid or until the time of the next review. - Outstanding ESF loans as of end-March 2019: SDR 127.8 million: - SDR 102.4 million under the ESF-HAC. - SDR 25.4 million under the ESF-RAC. - The rate on outstanding ESF loans would be 0.25 percent upon expiration of the interest rate waiver at end-June 2019. - These facilities were broadly superseded by the RCF (ESF-RAC) and the SCF (ESF-HAC) under the 2009 LIC reforms. - Continuing to waive the interest rate for outstanding ESF credit would align the charges with the PRGT rates applicable over the coming two years. - All outstanding ESF balances are expected to be repaid by November 2020. ### PRGT interest rates for July 2019–June 2021 - Under the proposed revised mechanism (based on the most recently observed 12-month average SDR rate): - zero interest rates on ECF and SCF credit for July 2019–June 2021, - RCF interest rate remains permanently at zero. - With the proposed modification and waiver of charges of ESF legacy credit, no interest would be charged on PRGT credit until June 2021. - Staff recommends waiving charges on outstanding balances under legacy ESF credit until all outstanding balances are fully repaid by November 2020 or until the time of the next review. - The next review of the PRGT interest rate structure would be completed by June 30, 2021, consistent with Section II, Paragraph 4(b) of the PRGT Instrument. ### Proposed Decision — key amendments (summary) - Effective July 1, 2019, and subject to Section IV, paragraph 5, interest on the outstanding balance of Trust loans shall be charged at the rate of zero percent per annum on loans under the ECF, the SCF, the ESF, and the RCF. - Interest rates for loans outstanding under the ECF and the SCF shall be subject to periodic reviews, with the first review to be completed by June 30, 2021, and subsequent reviews every two years thereafter. - In such reviews, and subject to Section IV, paragraph 5, the interest rate on outstanding balances of loans under the ECF and SCF shall normally be determined by the Trustee as follows: - If the SDR interest rate (average over the most recently observed 12-month period) is less than 2 percent, interest rate = zero percent per annum for ECF and SCF loans. - If the SDR interest rate (average over the most recently observed 12-month period) is between 2 percent and 5 percent, interest rate = 0.25 percent per annum for ECF and SCF loans. - If the SDR interest rate (average over the most recently observed 12-month period) is greater than 5 percent, interest rate = 0.5 percent per annum for ECF and SCF loans. - Notwithstanding paragraph (a) or any interest rate determined under paragraph (b), interest at a rate equal to the SDR interest rate shall be charged on the amounts of any overdue interest on or overdue repayments of Trust loans. *Prepared by the Finance Department and the Strategy, Policy, and Review Department (May 2, 2019).* ### 2015. Directors also supported the staff’s proposal to waive interest rate charges on the ### POVERTY REDUCTION AND GROWTH TRUST—REVIEW OF INTEREST RATE STRUCTURE ### Executive summary - This paper reviews the PRGT interest rate structure for the period July 2019–June 2021. - Applying the PRGT’s existing interest rate setting mechanism, as modified in 2016, would result in: - zero rate for the Extended Credit Facility (ECF), - a rate of 0.25 percent for the Standby Credit Facility (SCF), - and a zero rate for the Rapid Credit Facility (RCF). - The paper proposes to align interest rates on the SCF with those on the ECF as part of the Review of LIC Facilities, which would modestly increase concessionality and incur moderate subsidy costs that can be financed within the PRGT’s self-sustained financing envelope in the context of the full reform package. - Based on the average SDR rate over the most recently observed 12-month period, the proposed revised interest rate mechanism would result in: - zero interest rates on both ECF and SCF credit for the period July 2019–June 2021, - interest on RCF credit remaining permanently at zero, as decided in 2015. - Staff proposes to waive interest rate charges on legacy balances under the Exogenous Shocks Facility (ESF) until all outstanding credit is fully repaid or until the time of the next review, which should take place no later than June 2021. - Earlier text also notes Directors supported staff’s proposal to waive interest rate charges on outstanding legacy credit under the ESF until November 2020, by which time all the credit previously extended under the ESF is scheduled to be fully repaid, or until the time of the next review. ### Background and mechanism design - The PRGT interest rate mechanism was adopted in 2009 to increase flexibility of IMF support to LICs and balance objectives including: - increase concessionality of PRGT financing, - preserve Trust resources, - avoid permanently zero interest rates, - tailor terms to LICs’ needs and capacity, - limit fluctuations in concessionality and subsidy costs. - Key features: - Interest rates set for upcoming two years in biennial reviews. - Levels linked to the average SDR interest rate over the most recently observed 12-month period. - Prior design set SCF rate at 25 basis points above ECF. - Timeline of major modifications: - Temporary waiver of interest payments on outstanding concessional loans: effective January 7, 2010 and extended through end-December 2016. - July 2015: RCF interest rate set permanently at zero. - October 2016: mechanism amended to set both ECF and SCF to zero when average SDR rate ≤ 0.75 percent; ESF legacy balances’ interest charges waived until December 2018. - December 4, 2018: postponement of the next interest rate review to no later than June 30, 2019; existing zero percent interest rates on ECF and SCF continued through June 30, 2019; ESF legacy waiver extended by six months. ### PRGT interest rates in the current economic context (selected findings and statistics) - SDR interest rate evolution: - SDR rate declined to 0.05 percent in September 2014 and remained until September 2016; rose to reach 1.14 percent by end-March 2019. - Applying current mechanism (with 12-month average SDR rate above 0.75 percent) would yield: - SCF interest rate of 0.25 percent (outstanding SCF credit: SDR 264 million as of end-March 2019), - zero rate for most PRGT borrowers including outstanding ECF and RCF credit. - PRGT credit outstanding, as of end-March 2019 (in millions of SDRs): - ECF: 5,561 - RCF: 375 - SCF: 264 - ESF: 128 - Interest savings from temporary waivers and 2016 modification: estimated at SDR 23.3 million for January 2010–June 2019 (benefiting 20 member countries). - Degree of concessionality: - Average grant element in PRGT loans currently estimated to be below 30 percent, compared with a traditional benchmark of 35 percent. - Global and LIC outlook: - Global growth expected to slow to 3.3 percent in 2019. - Low-income countries face significant risks: volatile external conditions, tightening external financing conditions, climate change and natural disasters, trade tensions, subdued commodity prices, and rapidly increased public debt stocks. ### Proposed modifications and implications - Proposal: align SCF rate structure with ECF (see Table 3 / Table 1C logic referenced in the paper). - Under alignment: - SCF rate set at zero when the SDR rate is below 2 percent, - SCF rate reduced by 0.25 percent when SDR rate is above 2 percent (relative to prior SCF settings). - Implications: - Makes SCF more concessional. - Modest subsidy costs expected; staff notes these can be financed within PRGT’s self-sustained financing envelope when considered with the full LIC Facilities reform package. - Would delay the first adjustment in the interest rate on the SCF until average SDR rate exceeds 2 percent. ### Proposed interest rate structure for July 2019–June 2021 and related operational decisions - Under the proposed revised mechanism (based on the most recently observed 12-month average SDR rate): - zero interest rates on ECF and SCF credit for July 2019–June 2021, - RCF interest rate remains permanently at zero. - ESF legacy balances: - Staff proposes to waive interest rate charges on legacy balances under the ESF until all outstanding credit is fully repaid or until the time of the next review (to be held no later than June 2021). - Earlier language in the document indicates Directors supported waiving ESF legacy interest charges until November 2020, by which time ESF credit is scheduled to be fully repaid, or until the time of the next review. *Prepared by the Finance Department and the Strategy, Policy, and Review Department (May 2, 2019).* ### 14. The proposed modification would preserve the fundamental logic of the PRGT interest ### 14. The proposed modification would preserve the fundamental logic of the PRGT interest ### Rationale and expected effects - The proposed modification would preserve the fundamental logic of the PRGT interest rate mechanism while making it more concessional. - The lower rate structure would bring the expected average concessionality of the SCF closer to what was envisaged in the 2009 reforms, which did not anticipate the prolonged period of very low global rates. - The SCF’s somewhat shorter maturity and period before repayments are required to begin would preserve an element of tailoring PRGT financing terms to the diverse economic needs of eligible members. - The modified rate structure would have greater similarity to the (unsubsidized) financing terms in the GRA in the sense that SBA and EFF loans carry the same basic rate of charge but have different repayment periods. - The proposed modification preserves the link to world interest rates, allowing for non-zero rates and limiting fluctuations in the concessionality of PRGT loans and subsidy costs. ### Proposed interest rate mechanism (key parameters) - SDR rate: Average SDR interest rate over the most recently observed 12-month period. - RCF rate: Rate set permanently to zero as of July 2015. - Table of rates (In percent): - If SDR rate < 2: ECF/SCF = 0.00; RCF = 0.00 - If 2 ≤ SDR rate ≤ 5: ECF/SCF = 0.25; RCF = 0.00 - If SDR rate > 5: ECF/SCF = 0.50; RCF = 0.00 ### Subsidy costs and financing implications - The modifications proposed entail moderate subsidy costs, but can be financed with the resources of the self-sustained PRGT as part of the reform package proposed in the LIC Facilities Review. - The costs are relatively modest (SDR 1.8 million) for the existing stock of outstanding SCF credit. - In the steady state, assuming somewhat higher usage of SCF arrangements after the reforms proposed in the LIC Facilities Review: - Alignment of the SCF and ECF rates would cost about SDR 4.9 million annually. - This alignment would lower the PRGT’s self-sustained capacity by about SDR 0.03 billion. - These subsidy costs, together with the net costs of the access increase and other reforms, can be accommodated under the self-sustained PRGT while maintaining the self-sustained lending capacity target of SDR 1¼ billion. - Risks are evenly balanced over the coming decade though the longer-term outlook is subject to greater uncertainty. ### Legacy ESF credit: waiver proposal and outstanding amounts - There is a case for waiving the interest rate on legacy ESF credit until all outstanding balances are fully repaid or until the time of the next review. - As of end-March 2019, outstanding loans under the ESF amounted to SDR 127.8 million: - SDR 102.4 million are under the ESF-HAC. - SDR 25.4 million are under the ESF-RAC. - The rate on outstanding ESF loans would be 0.25 percent upon expiration of the interest rate waiver at end-June 2019. - These facilities were broadly superseded by the RCF (ESF-RAC) and the SCF (ESF-HAC) under the 2009 LIC reforms. - Continuing to waive the interest rate for outstanding ESF credit would align the charges with the PRGT rates applicable over the coming two years. - All outstanding ESF balances are expected to be repaid by November 2020. ### PRGT interest rates for July 2019–June 2021 - With the proposed modification and waiver of charges of ESF legacy credit, no interest would be charged on PRGT credit until June 2021. - With the 12-month average SDR rate currently below the 2 percent threshold, the interest rate on SCF and ECF credit would be zero for the period July 2019–June 2021. - As decided by the Executive Board in 2015, the RCF interest rate would remain permanently at zero. - Staff also recommends waiving charges on outstanding balances under legacy ESF credit until all outstanding balances are fully repaid by November 2020 or until the time of the next review. - The next review of the PRGT interest rate structure would be completed by June 30, 2021, consistent with Section II, Paragraph 4(b) of the PRGT Instrument. ### Proposed Decision — key amendments (summary) - Effective July 1, 2019, and subject to Section IV, paragraph 5, interest on the outstanding balance of Trust loans shall be charged at the rate of zero percent per annum on loans under the ECF, the SCF, the ESF, and the RCF. - Interest rates for loans outstanding under the ECF and the SCF shall be subject to periodic reviews, with the first review to be completed by June 30, 2021, and subsequent reviews every two years thereafter. - In such reviews, and subject to Section IV, paragraph 5, the interest rate on outstanding balances of loans under the ECF and SCF shall normally be determined by the Trustee as follows: - If the SDR interest rate (average over the most recently observed 12-month period) is less than 2 percent, interest rate = zero percent per annum for ECF and SCF loans. - If the SDR interest rate (average over the most recently observed 12-month period) is between 2 percent and 5 percent, interest rate = 0.25 percent per annum for ECF and SCF loans. - If the SDR interest rate (average over the most recently observed 12-month period) is greater than 5 percent, interest rate = 0.5 percent per annum for ECF and SCF loans. - Notwithstanding paragraph (a) or any interest rate determined under paragraph (b), interest at a rate equal to the SDR interest rate shall be charged on the amounts of any overdue interest on or overdue repayments of Trust loans. *Source: ppea2019023 - 14. The proposed modification would preserve the fundamental logic of the PRGT interest* --- _Source: https://www.imf.org/-/media/files/publications/pp/2019/ppea2019023.pdf_