## ppea2020037

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---

### Executive summary and introduction
- Purpose: review the Fund’s income position for FY 2020 and FY 2021–2022, update April 2019 projections, and propose decisions for the current year, including a proposed decision to set the margin for the rate of charge for financial years 2021 and 2022.
- Key new uncertainty driver: COVID-19 pandemic’s impact on discount rates, investment returns, and scale of new lending.
- Initial estimate of emergency lending associated with the COVID-19 pandemic: about SDR 26 billion (staff’s initial analysis based on requests and inquiries as of March 27).
- Staff recommendation: charge the GRA FY 2020 net loss against the special reserve.
- Staff recommendation: keep the margin for the rate of charge for the period FY 2021–2022 unchanged at 100 basis points.

### FY 2020 income position — headline figures and components
- Projected GRA net loss for FY 2020 (staff paper): about SDR 0.8 billion (after pension-related (IAS 19) expense).
- Net operational income (before IAS 19) projected (staff paper): about SDR 1.4 billion (moderately lower than April 2019 estimate of SDR 1.5 billion).
- Pension-related (IAS 19) expense projected (staff paper): about SDR 2.3 billion, producing the net loss of about SDR 0.8 billion.
- Endowment Subaccount (EA) investment income (staff paper): SDR 167 million.
- Resulting projected net income/(loss) position (including EA) — staff paper: net loss of SDR 637 million.
- Supplement revised FY 2020 projections (Supplement, April 21, 2020):
  - A net loss of about SDR 1 billion is now projected for the GRA in FY 2020 (compared with SDR 0.8 billion in the staff paper).
  - Table 1 (FY2020 Supplement Projections) key aggregates (SDR millions):
    - A. Operational income: 2,251
      - Lending income: 1,889
        - Margin for the rate of charge: 667
        - Service charges: 97
        - Commitment fees: 373
        - Surcharges: 752
      - Investment income: 253
        - Fixed-Income Subaccount (reserves): 253
        - Endowment Subaccount payout: 0
      - Interest free resources (SCA-1 and other): 44
      - Reimbursements: 65
    - B. Expenses: 895
      - Net administrative expenditures: 832
      - Capital budget items expensed: 18
      - Depreciation: 45
    - C. Net operational income (A-B): 1,356
    - Pension and other benefits related (IAS 19) losses: -2,375
    - D. Net operational income/(loss) after IAS 19 adjustment: -1,019
    - Endowment subaccount investment income: -126
    - Net income/(loss) position: -1,145
  - Precautionary balances (end of period, SDR billions) — Supplement: 16.5 (end-FY 2020).

### Net operational income components (staff paper Table 2 highlights)
- Total operational lending income projected (FY2020): SDR 1,942 million (about SDR 100 million lower than April 2019).
  - Margin for the rate of charge: SDR 673 million (SDR 62 million lower than initially projected).
  - Service charges: SDR 140 million (60 percent higher than the initial estimate).
  - Commitment fees: SDR 373 million (broadly in line with April 2019 projection).
  - Surcharges: decline reflecting advance repurchases and delayed disbursements.
- Investment income — Fixed-Income Subaccount (reserves): FY2020 SDR 298 million (staff paper; Supplement revised to SDR 253 million).
- Implicit earnings on interest free resources: SDR 45 million (FY2020, staff paper).
- Reimbursements to the GRA: SDR 65 million (including SDR 3 million for the SDR Department and SDR 62 million for PRG Trust).
- Expenses:
  - Total expenses projected (FY2020, staff paper): SDR 902 million (about SDR 14 million higher than previously projected).
  - Net administrative expenditures: SDR 839 million (staff paper).

### Pension-related (IAS 19) expense — nature, FY 2020 figures, and sensitivity
- Nature:
  - IAS 19 “Employee Benefits” accounts for pension and other employee benefits; pension-related (IAS 19) expense results from the actuarial remeasurement of post-employment benefit plans.
  - Remeasurement gains/(losses) arise from changes in the actuarially-assessed estimated future benefit obligation (DBO) and changes in the fair value of plan assets.
  - The actuarial remeasurement is highly sensitive to the discount rate and asset returns; a 100 basis point change in the discount rate can increase or decrease the value of the pension liability by 17 to 19 percent.
- FY 2020 projected pension statistics (staff paper):
  - Net actuarial remeasurement losses projected: SDR 2,083 million.
  - Projected actuarially-determined remeasurement of plan assets (negative): SDR 206 million.
  - Additional adjustment (difference between actuarial IAS 19 expense and funding): SDR 170 million.
  - Pension funding (projected cash appropriation for FY 2020): SDR 150 million.
  - Pension cost accrual (projected): SDR 320 million.
  - Projected total IAS 19 gains/(losses) for FY 2020: SDR -2,252 million.
  - Discount rate — end of period (projected): 2.71 percent (staff paper).
  - Discount rate reached a historic low of 2.71 percent at end-February 2020, following a 115 basis points decline since the start of the current financial year.
- Supplement revision to IAS 19 (Supplement, April 21, 2020):
  - Updated pension-related expense for FY 2020: total IAS 19 gains/(losses) = -2,375 (Supplement) versus -2,252 (Staff Paper).
  - Remeasurement gains/(losses): -2,204 (Supplement) versus -2,083 (Staff Paper).
  - Discount rate — at end of period (Supplement): 2.97 percent (Supplement) versus 2.71 percent (Staff Paper).
  - 'Excess return' on assets: -857 (Supplement) versus -206 (Staff Paper).
- Sensitivity of FY 2020 GRA net income (loss) to discount rate and asset returns (illustrative, in millions of SDRs; staff paper):
  - Current projected FY 2020 GRA net loss: SDR -804 million.
  - Illustrative independent changes (effects shown as "After" position):
    - Discount Rate:
      - 25bps change: -369 (After: -1,299)
      - 50bps change: 66 (After: -1,794)
      - 75bps change: 501 (After: -2,289)
      - 100bps change*: 936 (After: -2,784)
    - Asset Return:
      - 250bps change: -562 (After: -1,046)
      - 500bps change: -319 (After: -1,289)
      - 750bps change: -77 (After: -1,531)
      - 1000bps change*: 166 (After: -1,774)
    - *Project adjustments note: Projected net loss of SDR 804 million adjusted for a 100bps increase (decrease) in discount rate estimated at SDR 1,740 million (SDR 1,980 million), and a 1000bps change in asset return of about SDR 970 million, respectively.
  - Illustrative combined outcomes:
    - Minimum GRA net income (loss): SDR -3,754 (discount rate: ↓100bps, asset return: ↓1000bps).
    - Maximum GRA net income (loss): SDR 1,906 (discount rate: ↑100bps, asset return: ↑1000bps).
  - Example: an increase in the current discount rate by about 50 basis points, or an increase in asset returns of about 850 basis points, could — holding all other assumptions constant — result in a positive estimated net income position in the GRA by year end.

### Investment Account (IA) — Fixed-Income Subaccount (FI) and Endowment Subaccount (EA)
- Endowment Subaccount (EA) — staff paper:
  - FY 2020 estimated investment income (includes actual performance through end-February): SDR 167 million.
  - Note: Sharp sell-off in risk assets during March drove EA investment returns into negative territory after end-February; Supplement projects EA loss of about SDR 126 million for FY 2020.
  - Staff proposed that any EA investment income for FY 2020 be retained in the subaccount rather than transferred to the GRA.
  - Retaining the projected EA income of about SDR 167 million would raise cumulative retained earnings of the IA to about SDR 1,263 million (staff paper); Supplement projects cumulative retained earnings of about SDR 970 million given EA loss.
- Fixed-Income Subaccount (FI) — findings (Supplement and staff paper):
  - FI objective: achieve returns in excess of the 3-month SDR interest rate over a three- to four-year horizon.
  - Current portfolio duration: approximately 1.5 years.
  - Market context: SDR government bond yields declined around 75 basis points on average since last year; longer maturity yields close to historic lows with an inverted yield curve.
  - One-year horizon expected FI return range: SDR 5 million to SDR 155 million (based on portfolio size of SDR 16.7 billion and one standard deviation around average projected return).
  - Estimated worst-case loss: about -0.9 percent (95 percent CVaR), equivalent to an SDR 150 million loss.
  - For the fiscal year through the end of March, the FI had generated a return of 1.45 percent, 69 bps greater than the average SDRi.

### FY 2021–2022 income outlook — projections, drivers, and key figures
- Projected net income excluding any pension-related gain or loss (staff paper):
  - FY 2021: SDR 1.4 billion.
  - FY 2022: SDR 1.8 billion.
- Supplement projections (excluding IAS 19 beyond FY 2020):
  - FY 2021 net income position: SDR 1,412 million.
  - FY 2022 net income position: SDR 1,745 million.
- Drivers and sensitivities:
  - Projections incorporate initial estimates of emergency lending associated with the COVID-19 pandemic (about SDR 26 billion) but are subject to high uncertainty.
  - Key sensitivities: global interest rates, timing of purchases and repurchases, possible new arrangements, U.S. dollar/SDR exchange rate, annual pension-related adjustment under IAS 19.
- Lending income projections (staff paper Table 2 highlights, SDR millions):
  - Operational income (Initial estimate): FY2020: 2,350; FY2021: 2,145; FY2022: 2,592.
  - Lending income: FY2020: 1,942; FY2021: 1,968; FY2022: 2,354.
  - Margin for the rate of charge: FY2020: 673; FY2021: 926; FY2022: 910.
  - Service charges: FY2020: 140; FY2021: 59; FY2022: 16.
  - Commitment fees: FY2020: 373; FY2021: 40; FY2022: 285.
  - Surcharges: FY2020: 756; FY2021: 943; FY2022: 1,143.
- Investment income projections (staff paper Table 2):
  - Investment income: FY2020: 298; FY2021: 103; FY2022: 154.
  - Fixed-Income subaccount: FY2020: 298; FY2021: 46; FY2022: 96.
  - Endowment subaccount payout: FY2020: 1; FY2021: 0; FY2022: 57.
  - Income in SDR terms retained in the EA and not distributed: FY2021: about SDR 130 million; FY2022: about SDR 91 million (staff paper).
- Memorandum statistics (staff paper Table 2):
  - Fund credit (average stock, SDR billions): FY2020: 67.3; FY2021: 92.6; FY2022: 91.0.
  - SDR interest rate (average, in percent): FY2020: 0.8; FY2021: 0.1; FY2022: 0.2.
  - US$/SDR exchange rate (average): FY2020: 1.38; FY2021: 1.40; FY2022: 1.41.
  - Precautionary balances (end of period, SDR billions): FY2020: 16.7; FY2021: 18.0; FY2022: 19.6.

### Sensitivity analysis and illustrative scenarios (FY 2021–22)
- Pension-related (IAS 19) gains/losses are a major source of uncertainty; illustrative ranges for FY 2021 and FY 2022 baseline net income projections given discount rate and asset return changes (staff paper):
  - FY 2021: net income or loss can range between SDR (4.1 and -0.4) billion.
  - FY 2022: net income or loss can range between SDR (4.6 and -0.1) billion.
- Supplement illustrative scenarios (April 21, 2020):
  - Favorable scenario:
    - Discount rate: 3.71 percent by the end of FY 2022.
    - Asset gains: 10 percent annual returns.
    - Result: projected net income would increase to SDR 3.2 billion by end-FY 2021 and SDR 3.7 billion by end-FY 2022.
  - Adverse scenario:
    - Discount rates: 2.21 percent at end-FY 2021 and 1.71 percent by end-FY 2022.
    - Asset returns: 2 percent annual returns.
    - Result: projected net income reduced to SDR 0.6 billion by end-FY 2021 and SDR 0.9 billion by end-FY 2022.
  - These scenarios are illustrative and keep other financial and demographic assumptions constant.

### Review of the margin for the rate of charge (Rule I-6(4)) and staff assessment
- Rule context:
  - The Board sets the margin for the basic rate of charge for financial years 2021–22 with a mid-period review before the end of the first year.
  - The margin should cover intermediation costs, consider income from service charges, help build reserves, and align borrowing costs with long-term credit market conditions; exceptional circumstances may warrant deviation.
- Staff view and proposal:
  - The margin has been set at 100 basis points since May 2008.
  - Staff proposes maintaining the margin at 100 basis points for FY 2021–22 (Decision 4).
  - Rationale: current level broadly aligned with long-term credit market conditions and the exceptional circumstances clause applies.
  - Directors will have an opportunity to review the level of the margin before the end of FY 2021.
- Alignment with market borrowing costs (staff paper):
  - At end-February 2020, the five-year median for the lowest quartile EMBI spreads stood at 153 basis points (53 basis points above the current margin).
  - Staff bases assessment on credit-risk adjusted EMBI spreads; past maturity adjustments produced marginal changes (~ten basis points) and are not applied here.
  - Staff assessment of the alignment of the margin has not changed since end-February (Supplement updates note inclusion of recent spread spikes but five-year rolling medians remain broadly unchanged).

### Coverage of intermediation costs, surcharges, commitment fees, and reserves
- Coverage and key figures (staff paper Table 4 and select entries):
  - Intermediation costs (A): US$104 million (FY 2020 estimate).
  - Income from service charges (B): US$193 million (FY 2020 estimate).
  - An unchanged margin of 100 basis points would provide further income of about US$928 million (FY 2020 estimate).
  - Commitment fees (E): US$515 million (FY 2020 estimate).
  - Surcharges (F): US$1,043 million (FY 2020 estimate).
- Reserve accumulation outlook:
  - Potential reserve accumulation with a margin of 100 basis points would rise to 10.6 percent in FY 2020 (hypothetical if lending income solely used as described).
  - Projected actual reserve accumulation (after the large IAS 19 loss) is -4.6 percent of reserves in FY 2020.
  - Precautionary balances projected to decline to SDR 16.7 billion by end-FY 2020 (staff paper) and revised to SDR 16.5 billion in the Supplement.
  - Indicative medium-term target for precautionary balances of SDR 20 billion could be reached by FY 2023 (two years later than projected in April 2019).

### Burden sharing adjustments and related parameters
- Current projected burden sharing rates in Q4 FY 2020: 0.3 basis points for both debtors and creditors (staff paper).
- A 5 basis point floor on the SDR interest rate is applied to preserve minimal capacity of equal burden sharing.
- Mechanism allows “carry-forward” of excess amounts generated from minimum adjustments to the rate of charge and the rate of remuneration.
- Decline in interest rates and clearance of Somalia’s arrears affect burden sharing adjustment rates and capacity; projected burden sharing rates to be updated in supplement.

### Proposed decisions and procedural items (summary)
- Decisions Pertaining to FY 2020 (proposed in paper and supplement):
  - Decision 1: Assessment on SDR Department participants for reimbursement of General Department expenses for SDR Department in FY 2020; an assessment of 0.00132887 percent of net cumulative SDR allocations to be debited April 30, 2020.
  - Decision 2: Reimbursement to the General Resources Account of SDR 61.76 million from the PRGT Reserve Account representing the cost of administering the PRGT for FY 2020.
  - Decision 3: Transfer of income of the Fixed-Income Subaccount of the Investment Account for FY 2020 to the General Resources Account for FY 2020 administrative expenses; income of the Endowment Subaccount for FY 2020, if any, shall be retained.
- Decision Pertaining to FY 2021–22:
  - Decision 4: Set the rate of charge on the use of Fund resources for FY 2021–2022 at 100 basis points over the SDR interest rate (staff proposal).

### Consolidated medium-term projections and scenarios (selected consolidated figures)
- Consolidated baseline projections (selected SDR million entries, baseline panels):
  - A. Operational income: FY20 = 2,350; FY21 = 2,145; FY22 = 2,592; FY23 = 1,924; FY24 = 1,188.
  - Lending income: FY20 = 1,942; FY21 = 1,968; FY22 = 2,354.
  - Investment income (E panel): FY20 = 411; FY21 = 144; FY22 = 217.
  - Net operational income after pension-related (IAS 19) adjustment (panel D/C): FY20 = -804; FY21 = 1,240; FY22 = 1,663.
  - Net income (loss): FY20 = -637; FY21 = 1,370; FY22 = 1,754.
- Consolidated medium-term outlook (Supplement consolidated excerpts):
  - Net operational income (loss) after pension-related (IAS 19) adjustment: FY20 = -1,019; FY21 = 1,296; FY22 = 1,623.
  - Net income (loss): FY20 = -1,145; FY21 = 1,412; FY22 = 1,745.
  - Memorandum items: Fund credit (average stock, SDR billions): FY20 = 66.7; FY21 = 96.1; FY22 = 95.1.

### Procedural and accounting notes
- The pension-related (IAS 19) adjustment for FY 2020 will be finalized after year-end using inputs as of April 30; ongoing market volatility means actual outturn could differ significantly from projections.
- Reimbursements and SDA-related administrative decisions (staff paper):
  - Proposed reimbursement for SDR Department expenses: SDR 2.71 million.
  - Proposed PRGT administrative expenses reimbursement: SDR 61.76 million.
  - No proposed reimbursements related to SDA resources in the CCR and PRG-HIPC Trusts for FY 2020.
- Staff will finalize IFRS 9-related country assessments and brief the Board before finalizing the FY 2020 annual financial statements; under IFRS 9 the Fund’s adapted framework expects provisioning events to remain very rare.

_International Monetary Fund — Review of the Fund’s Income Position for FY 2020 and FY 2021–2022 (selected excerpts and Supplementary Information)._

### EXECUTIVE SUMMARY

### EXECUTIVE SUMMARY

### Introduction
- Purpose: review the Fund’s income position for FY 2020 and FY 2021–2022, update April 2019 projections, and propose decisions for the current year, including a proposed decision to set the margin for the rate of charge for financial years 2021 and 2022.
- Key new uncertainty driver: COVID-19 pandemic’s impact on discount rates, investment returns, and scale of new lending.
- Initial estimate of emergency lending associated with the COVID-19 pandemic: about SDR 26 billion.

### FY 2020 income position — key findings
- Projected GRA net loss for FY 2020: about SDR 0.8 billion (after pension-related (IAS 19) expense).
- Net operational income (before IAS 19) projected: about SDR 1.4 billion, moderately lower than April 2019 estimate of SDR 1.5 billion.
- Pension-related (IAS 19) expense projected: about SDR 2.3 billion, producing the net loss of about SDR 0.8 billion.
- Endowment Subaccount (EA) investment income: SDR 167 million.
- Resulting projected net income/(loss) position (including EA): net loss of SDR 637 million (Table 1, Current Projections).
- Net operational income components:
  - Total operational lending income projected: SDR 1,942 million (about SDR 100 million lower than April 2019).
    - Margin for the rate of charge: SDR 673 million (SDR 62 million lower than initially projected).
    - Service charges: SDR 140 million (60 percent higher than the initial estimate).
    - Commitment fees: SDR 373 million (broadly in line with April 2019 projection).
    - Surcharges: decline reflecting advance repurchases and delayed disbursements.
  - Investment income — Fixed-Income Subaccount (reserves): SDR 298 million (up from SDR 208 million in earlier estimate, based on actual returns to end-February).
  - Implicit earnings on interest free resources: SDR 45 million (lower than previously estimated due to lower SDR interest rates).
  - Reimbursements to the GRA: SDR 65 million (including SDR 3 million for the SDR Department and SDR 62 million for PRG Trust).
- Expenses:
  - Total expenses projected: SDR 902 million (about SDR 14 million higher than previously projected).
  - Net administrative expenditures: SDR 839 million.
- Memorandum statistics:
  - Fund credit (average stock): 67.3 (SDR billions).
  - SDR interest rate (average): 0.8 (percent).
  - US$/SDR exchange rate (average): 1.38.
  - Precautionary balances (end of period): SDR 16.7 (SDR billions).

### Disposition and policy recommendations
- Staff recommends charging the GRA FY 2020 net loss against the special reserve.
- After charging the FY 2020 net loss and adjusting for a one-off distribution of SDR 122 million from the SCA-1, projected precautionary balances at end-FY 2020: SDR 16.7 billion.
- Staff recommends keeping the margin for the rate of charge for the period FY 2021–2022 unchanged at 100 basis points.

### FY 2021–2022 income outlook — projections and uncertainties
- Projected net income excluding any pension-related gain or loss:
  - FY 2021: SDR 1.4 billion.
  - FY 2022: SDR 1.8 billion.
- These projections incorporate initial estimates of emergency lending associated with the COVID-19 pandemic (about SDR 26 billion) but are subject to a high degree of uncertainty.
- Key additional uncertainty for FY 2021–22: scale and timing of new lending linked to the economic fallout from the pandemic, and future pension-related (IAS 19) gains or losses and investment returns.
- Staff will update projections in a supplement closer to the Executive Board meeting to reflect actual emergency finance disbursements and market developments affecting IAS 19 and investment returns.

### Other procedural and accounting notes
- The pension-related (IAS 19) adjustment for FY 2020 will be finalized after year-end using inputs as of April 30; ongoing market volatility means actual outturn could differ significantly from projections.
- Reimbursements and SDA-related administrative decisions:
  - Proposed reimbursement for SDR Department expenses: SDR 2.71 million.
  - Proposed PRGT administrative expenses reimbursement: SDR 61.76 million.
  - No proposed reimbursements related to SDA resources in the CCR and PRG-HIPC Trusts for FY 2020.

*Prepared by the Finance Department in consultation with the Legal Department and the Office of Budget and Planning (April 13, 2020).*

### 11.      The pension-related (IAS 19) expense results from the actuarial remeasurement of the

### The pension-related (IAS 19) expense results from the actuarial remeasurement of the

### Pension-related (IAS 19) expense — nature and drivers
- IAS 19 “Employee Benefits” deals with accounting for pension and other employee benefits.
- The pension-related (IAS 19) expense results from the actuarial remeasurement of the Fund’s post-employment benefits plans, and is volatile year-on-year but has tended to offset over time.
- Remeasurement gains/(losses) arise from:
  - changes in the actuarially-assessed estimated future benefit obligation (DBO); and
  - changes in the fair value of plan assets.
- The actuarially determined remeasurement is highly sensitive to the discount rate and to asset returns; a 100 basis point change in the discount rate can increase or decrease the value of the pension liability by 17 to 19 percent.

### FY 2020 projections and key statistics (pension-related)
- Net actuarial remeasurement losses projected: SDR 2,083 million.
- Projected actuarially-determined remeasurement of plan assets (negative): SDR 206 million.
- Additional adjustment (difference between actuarial IAS 19 expense and funding): SDR 170 million.
- Pension funding (projected cash appropriation for FY 2020): SDR 150 million.
- Pension cost accrual (projected): SDR 320 million.
- Projected total IAS 19 gains/(losses) for FY 2020: SDR -2,252 million.
- Discount rate — end of period (projected): 2.71 percent.
- Discount rate reached a historic low of 2.71 percent at end-February 2020, following a 115 basis points decline since the start of the current financial year; compared with a 19 basis points drop experienced in FY 2019.
- Remeasurement drivers in the Text Table (selected FY 2020 projected figures, in millions of SDRs):
  - Accrual vs. Funding: -170
  - Pension cost accrual: -320
  - Service cost: -309
  - Interest expense on pension liability: -377
  - Expected income on pension asset: 366
  - Pension funding: 150
  - Remeasurement gains/(losses): -2,083
  - Discount rate change: -2,228
  - 'Excess return' on assets: -206
  - Exchange rate translation: -24
  - Other: 376

### Sensitivity of FY 2020 GRA net income (loss) to discount rate and asset returns
- Current projected FY 2020 GRA net loss: SDR -804 million.
- Illustrative independent changes (effects shown as "After" position; figures in millions of SDRs):
  - Discount Rate:
    - 25bps change: -369 (After: -1,299)
    - 50bps change: 66 (After: -1,794)
    - 75bps change: 501 (After: -2,289)
    - 100bps change*: 936 (After: -2,784)
  - Asset Return:
    - 250bps change: -562 (After: -1,046)
    - 500bps change: -319 (After: -1,289)
    - 750bps change: -77 (After: -1,531)
    - 1000bps change*: 166 (After: -1,774)
  - *Project adjustments note: Projected net loss of SDR 804 million adjusted for a 100bps increase (decrease) in discount rate estimated at SDR 1,740 million (SDR 1,980 million), and a 1000bps change in asset return of about SDR 970 million, respectively.
- Illustrative combined outcomes (discount rate and asset return changes):
  - Minimum GRA net income (loss): SDR -3,754 (discount rate: ↓100bps, asset return: ↓1000bps).
  - Maximum GRA net income (loss): SDR 1,906 (discount rate: ↑100bps, asset return: ↑1000bps).
- Example illustrative scenario: an increase in the current discount rate by about 50 basis points, or an increase in asset returns of about 850 basis points, could — given the net loss currently projected for FY 2020 and holding all other actuarial and income assumptions constant — result in a positive estimated net income position in the GRA by year end.

### Investment income (IA/Endowment) and disposition decisions relevant to pension volatility
- Endowment Subaccount (EA) FY 2020 estimated investment income (includes actual performance through end-February): SDR 167 million.
  - Note: Sharp sell-off in risk assets during March drove EA investment returns into negative territory after end-February; an updated projection will be provided in the staff supplement.
  - Staff proposed that any EA investment income for FY 2020 be retained in the subaccount rather than transferred to the GRA.
- Retained earnings impact:
  - Retaining the projected EA income of about SDR 167 million would raise cumulative retained earnings of the IA (all attributed to the EA) to about SDR 1,263 million.
- Reserves and transfers:
  - After charging an actual GRA net loss to the special reserve, the combined balance in reserves would total about SDR 20.1 billion, below the net cumulative amount of transfers made thus far to the IA from the GRA of SDR 20.9 billion.
  - Consequently, there would be no transfer of currencies to the IA.
- Articles and disposition guidance:
  - Article V, Section 12(i) requires the GRA to be reimbursed from time to time for SDA administration expenses paid from the GRA, by transfers from the SDA on the basis of a reasonable estimate of such expenses; no reimbursement is needed if no incremental costs are incurred.
  - Article XII, Section 6(f)(iv) permits IA investment income to be invested, held in the IA, or used for meeting the expenses of the Fund.
  - The special reserve historically absorbs administrative deficits first; operational deficits have been charged against the special reserve since its establishment in 1957.

### Policy implications and staff view
- The pension-related (IAS 19) adjustment is expected to remain unpredictable; volatility in actuarial assumptions (notably the discount rate) will translate into volatility in the Fund’s income and reserves.
- Given the high unpredictability of future actuarial assumptions and asset returns, staff consider explaining the pension-related (IAS 19) outcome relative to a zero base more coherent than relative to a projected outcome based on hypothetical forward-looking assumptions.
- Going forward, although pension gains and losses tend to offset over time, short-run remeasurement effects can be large and materially affect annual income and reserve positions.
- Staff will finalize IFRS 9-related country assessments and brief the Board before finalizing the FY 2020 annual financial statements; under IFRS 9 the Fund’s adapted framework expects provisioning events to remain very rare given the Fund’s multilayered credit-risk framework.

*Source: ppea2020037 - 11. The pension-related (IAS 19) expense results from the actuarial remeasurement of the*

### 23.      The economic outlook over the coming years remains highly uncertain in the wake of

### 23.      The economic outlook over the coming years remains highly uncertain in the wake of 

### Overview
- Governments and policy makers worldwide have taken unprecedented steps to curb the fallout from the COVID-19 pandemic.
- Interest rate paths across major economies have trended lower and equity markets have recently experienced considerable turbulence.
- Financial markets remain volatile and this volatility is expected to prevail at least in the near term, adding to the uncertainty in the Fund’s income outlook.
- Deterioration in the global economic outlook is expected to result in significantly higher demand for Fund resources in the near term, resulting in higher income from lending over the medium term.
- Staff’s initial analysis of potential new demand for Fund lending is about SDR 26 billion, mainly in the form of emergency financing (based on requests and inquiries for financing by member countries as of March 27).

### FY 2021–2022 projected net income and drivers
- Net income projections (excluding the impact of the pension-related gain or loss) are:
  - SDR 1.4 billion for FY 2021
  - SDR 1.8 billion for FY 2022
- Projections assume the margin is maintained at 100 basis points and are sensitive to:
  - Global interest rates
  - Timing of purchases and repurchases under existing arrangements
  - Possible new arrangements
  - U.S. dollar/SDR exchange rate
  - Annual pension related adjustment as determined under IAS 19

### Key FY 2021–2022 income outlook factors
- Lending income
  - Margin and surcharge income is projected to increase steadily in FY 2021–22, averaging about SDR 0.9 billion and SDR 1 billion, respectively, reflecting mainly new demand for emergency financing and continued disbursements under current arrangements.
  - Colombia’s precautionary arrangement scheduled to expire in FY 2021 is expected to contribute SDR 40 million in commitment fees.
  - Commitment fee income of about SDR 285 million is projected for FY 2022 mainly from Mexico’s Flexible Credit Line (FCL) when it expires.
  - Note: projections take account of arrangements approved through end-February 2020 and not possible new arrangements, except for Argentina where it is assumed that no further disbursements will take place under the current arrangement.
- Fixed-Income Subaccount
  - Investment income expected to decline sharply to about SDR 46 million in FY 2021 and SDR 96 million in FY 2022.
  - Estimated average return of about 0.43 percent over the two years.
- Endowment Subaccount (EA)
  - Total EA returns projected to average about 3.3 percent over the medium term.
  - High short-term volatility across EA asset classes affects projections.
  - Projections assume an initial payout of 1 percent commencing in FY 2021, increased in U.S. dollar terms by the GED rate each year thereafter.
  - Estimated payout in FY 2021 equivalent to about SDR 57 million.
  - Projected payout in FY 2022 equivalent to about SDR 58 million.
  - Income in SDR terms retained in the EA and not distributed as a payout is expected to be about SDR 130 million in FY 2021 and SDR 91 million in FY 2022.
- Interest-free resources and reimbursements
  - Income from interest-free resources projected to be lower reflecting the lowering of the SDR interest rate path.
  - Projected reimbursements are based on the FY 2020–21 estimates.
- Expenditures
  - Net administrative expenses consistent with medium-term budget paper; flat net administrative budget in real terms.
  - Capital budget items expensed expected to be lower going forward reflecting completion of HQ1 renewal project in FY 2020.
- Pension and other benefits related (IAS 19) gains and losses
  - Forward-looking projections about demographic and other actuarial assumptions and asset returns have not been built into income scenarios due to volatility and unpredictability of these assumptions.

### Tables and headline figures (select from Table 2)
- Operational income (Initial estimate)
  - FY2020: 2,350 (in millions of SDRs)
  - FY2021: 2,145
  - FY2022: 2,592
- Lending income
  - FY2020: 1,942
  - FY2021: 1,968
  - FY2022: 2,354
  - Margin for the rate of charge: FY2020: 673; FY2021: 926; FY2022: 910
  - Service charges: FY2020: 140; FY2021: 59; FY2022: 16
  - Commitment fees: FY2020: 373; FY2021: 40; FY2022: 285
  - Surcharges: FY2020: 756; FY2021: 943; FY2022: 1,143
- Investment income
  - FY2020: 298
  - FY2021: 103
  - FY2022: 154
  - Fixed-Income subaccount (reserves): FY2020: 298; FY2021: 46; FY2022: 96
  - Endowment subaccount payout: FY2020: 1; FY2021: 0; FY2022: 57
- Interest free resources
  - FY2020: 45; FY2021: 7; FY2022: 16
- Reimbursements
  - FY2020: 65; FY2021: 67; FY2022: 68
- Expenses
  - FY2020: 902; FY2021: 905; FY2022: 929
  - Net administrative expenditures: FY2020: 839; FY2021: 847; FY2022: 866
  - Depreciation: FY2020: 45; FY2021: 49; FY2022: 54
- Net operational income (A-B)
  - FY2020: 1,448; FY2021: 1,240; FY2022: 1,663
- Pension and other benefits related (IAS 19) losses
  - FY2020: -2,252; FY2021: 0; FY2022: 0
- Net operational income/(loss) after IAS 19 adjustment
  - FY2020: -804; FY2021: 1,240; FY2022: 1,663
- Endowment subaccount investment income
  - FY2020: 167; FY2021: 130; FY2022: 91
- Net income position
  - FY2020: -637; FY2021: 1,370; FY2022: 1,754
- Fund credit (average stock, SDR billions)
  - FY2020: 67.3; FY2021: 92.6; FY2022: 91.0
- SDR interest rate (average, in percent)
  - FY2020: 0.8; FY2021: 0.1; FY2022: 0.2
- US$/SDR exchange rate (average)
  - FY2020: 1.38; FY2021: 1.40; FY2022: 1.41
- Precautionary balances (end of period, SDR billions)
  - FY2020: 16.7; FY2021: 18.0; FY2022: 19.6

### Sensitivity analysis and risks
- Pension-related (IAS 19) gain or loss is highly unpredictable and can be significant due to:
  - Asset performance volatility
  - Defined benefit obligation sensitivity to actuarial assumptions, particularly the discount rate
- Illustrative range for FY 2021 and FY 2022 baseline net income projections given changes in discount rate and asset returns:
  - FY 2021: net income or loss can range between SDR (4.1 and -0.4) billion
  - FY 2022: net income or loss can range between SDR (4.6 and -0.1) billion
- Table 3: Selected sensitivity effects on FY 2021 projected income (in millions of SDRs)
  - SDR interest rate by 50 basis points — Implicit returns: 37
  - Margin for the rate of charge by 20 basis points — 185
  - US dollar vis-à-vis SDR by five percent — Administrative expenses: 40
  - US dollar vis-à-vis SDR by 1 US cent — Endowment Subaccount: (figure referenced but not listed numerically in the excerpt)
  - Investment income margin by 50 basis points — 112

### Review of the margin for the rate of charge (Rule I-6(4))
- The Board must set the margin for the basic rate of charge for financial years 2021–22, with a mid-period review before the end of the first year.
- The margin should be set to:
  - Cover the Fund’s intermediation costs, taking into account income from service charges
  - Help build up the Fund’s reserves, considering existing precautionary balances and expected contribution from surcharges and commitment fees
  - Ensure the Fund’s borrowing costs remain appropriately aligned with long-term credit market conditions
- The rule permits exceptional circumstances to warrant setting the margin at a different level than required to cover intermediation expenses and accumulate reserves.
- The margin has been set at 100 basis points since May 2008.

### Coverage of intermediation costs, commitment fees, and surcharges (select from Table 4)
- FY 2020 estimated figures (in US$ unless otherwise indicated)
  - Intermediation costs (A): 104 (in millions of US Dollars)
  - Income from service charges (B): US$193 million (paragraph reference)
  - An unchanged margin of 100 basis points would provide further income of about US$928 million.
  - Commitment fees (E): US$515 million (FY 2020 estimate)
  - Surcharges (F): US$1,043 million (FY 2020 estimate)
- Non-lending income is projected to cover only about 20 percent of the Fund’s non-lending administrative expenses in FY 2021–22 due to lower SDR interest rate projections.

### Reserve accumulation outlook
- Potential reserve accumulation (hypothetical if lending income solely used to cover intermediation costs and provide additional reserves) with a margin of 100 basis points would rise to 10.6 percent in FY 2020.
- Projected actual reserve accumulation (after the large IAS 19 loss) is -4.6 percent of reserves in FY 2020.
- Precautionary balances projected to decline to SDR 16.7 billion by end-FY 2020 (significantly lower than the SDR 19.2 billion estimated in April 2019).
- Under the latest baseline, reserve accumulation is expected to resume in FY 2021 and FY 2022 and proceed at a steady pace, though lower than projected in April 2019.
- Indicative medium-term target for precautionary balances of SDR 20 billion could be reached by FY 2023 (two years later than projected in April 2019).

### Alignment with market borrowing costs
- Rule I-6(4) requires a cross-check of the margin’s alignment with long-term credit market conditions, using EMBI spreads as a benchmark guide (with judgment).
- The margin is compared to the lowest quartile of EMBI spreads to account for lower credit risk the Fund faces as a cooperative public policy institution.
- Staff views EMBI-based measures as the most appropriate metric of long-term market conditions given currently available measures.

*Review of the Fund’s Income Position for FY 2020 and FY 2021–2022 (excerpt).*

### 34.      The cost of Fund credit at the current margin remains broadly in line with the staff

### ppea2020037 - 34.      The cost of Fund credit at the current margin remains broadly in line with the staff

### Alignment of the margin with long-term credit market conditions
- Staff assessment: the cost of Fund credit at the current margin remains broadly in line with staff benchmarks for long-term credit market conditions.
- Recent EMBI developments:
  - EMBI spreads declined through end-2019, then slightly picked up through February 2020.
  - Five-year rolling average of the spreads remains broadly unchanged, but could be expected to increase in the near term if current conditions persist.
  - At end-February 2020, the five-year median for the lowest quartile EMBI spreads stood at 153 basis points (53 basis points above the current margin).
- Methodological note:
  - Past adjustments for maturity difference between the SDR interest rate and EMBI measures produced marginal adjustments in the magnitude of ten basis points; this review bases the assessment solely on credit-risk adjusted EMBI spreads.

- Key long-term credit market statistics (Table 5, median spreads in SDR-equivalent basis points):
  - Composite EMBI Global:
    - 5-year average: 245; 289; 290
    - 5-year median: 219; 277; 292
  - Composite EMBI Global, Lowest Quartile:
    - 5-year average: 165; 195; 161
    - 5-year median: 151; 180; 153
  - Memorandum items:
    - Past borrowers (5-year median): 237; 302; 269
  - Margin for the rate of charge (5-year average): 104; 100; 100

### Exceptional circumstances clause, non-lending income, and coverage
- Exceptional circumstances clause:
  - In an environment of persistently low global interest rates, the exceptional circumstances clause under Rule I-6(4) remains applicable for setting the margin for the rate of charge.
- Drivers of reliance on lending income:
  - Investment income, the main source of the Fund’s non-lending income, is lower than previous projections due to lower interest rates and slower reserve accumulation.
  - Payouts from the Endowment Subaccount are expected to provide a contribution from FY 2021, but the baseline assumes a lower 1 percent payout (alternative projection assumes 1.5 percent payout).
  - Consequently, the Fund will need to continue to rely on lending income to cover a significant portion of non-lending operating costs.
- Projected coverage of non-lending administrative expenses:
  - Non-lending income is projected to decline in FY 2021 and gradually increase in the medium term, covering about 29 percent of the Fund’s non-lending administrative expenses by FY 2026.
  - The commencement of payouts from the Endowment Subaccount is assumed in FY 2021 under the baseline.

### Margin decision and governance
- Staff proposal:
  - Maintain the margin for the rate of charge at 100 basis points for FY 2021–22 (proposed Decision 4).
  - Rationale: current level of the margin appears broadly aligned with long-term credit market conditions and the exceptional circumstances clause applies.
- Governance:
  - In line with Rule I-6(4), Directors will have an opportunity to review the level of the margin before the end of FY 2021.
  - Decision 4 sets the rate of charge for FY 2021 and FY 2022 at 100 basis points over the SDR interest rate and may be adopted by a 70 percent majority of the total voting power.

### Burden sharing adjustments and related parameters
- Current projected burden sharing:
  - Projected burden sharing rates in Q4 FY 2020 stand at 0.3 basis points for both debtors and creditors.
  - A 5 basis point floor on the SDR interest rate is applied to preserve a minimal capacity of equal burden sharing and limit potential departures of the SDR interest rate from market interest rates.
- Mechanism and carry-forward:
  - The burden sharing decision allows for a “carry-forward” of excess amounts generated from a minimum adjustment to the rate of charge and the rate of remuneration; if amounts brought forward offset deferred charges in subsequent quarter(s), no adjustments are necessary for such quarters.
- Recent influences and updates:
  - Decline in interest rates and the clearance of Somalia’s arrears will affect burden sharing adjustment rates and capacity.
  - The decline in residual burden sharing capacity is expected to reflect the sharp fall in the SDR interest rate since end-February, partly offset by the clearance of Somalia’s arrears.
  - Projected burden sharing adjustment rates will be updated in the supplement to the paper.

- Selected historical rates and averages (Table 6 excerpts):
  - Projected Q4 FY 2020 burden sharing rates: 0.300 basis points (debtors and creditors).
  - Average SDR interest rate (recent entries): 0.09; 0.09; 0.061; 0.051; 0.187; 0.678; 1.037; 0.767
  - Average basic rate of charge (recent entries): 1.09; 1.09; 1.061; 1.051; 1.187; 1.678; 2.037; 1.767

### Proposed decisions (summary)
- Decisions Pertaining to FY 2020:
  - Decision 1: Assessment on SDR Department participants for reimbursement of General Department expenses for SDR Department in FY 2020; an assessment of 0.00132887 percent of net cumulative SDR allocations to be debited April 30, 2020.
  - Decision 2: Reimbursement to the General Resources Account of SDR 61.76 million from the PRGT Reserve Account representing the cost of administering the PRGT for FY 2020.
  - Decision 3: Transfer of income of the Fixed-Income Subaccount of the Investment Account for FY 2020 to the General Resources Account for FY 2020 administrative expenses; income of the Endowment Subaccount for FY 2020, if any, shall be retained.
- Decisions Pertaining to FY 2021–22:
  - Decision 4: Set the rate of charge on the use of Fund resources for FY 2021–2022 at 100 basis points over the SDR interest rate.

### IAS 19 accounting for employee benefits and sensitivity considerations
- IAS 19 background and implications:
  - IAS 19 prescribes accounting for short-term employee benefits and post-employment benefits; the Fund recognizes a net asset or liability equal to the difference between the fair value of plan assets and the net present value of the defined benefit obligation.
  - Changes in actuarial assumptions (discount rate, salary increases, inflation, medical costs, mortality, turnover) give rise to actuarial gains or losses; under IAS 19 (post-2014 amendment) all gains and losses are recognized in the year incurred.
  - Remeasurement gains and losses introduce volatility to Fund income and reserves; historically, variances in the discount rate and movements in plan asset fair values have had the largest impact.
- Historical and projected volatility:
  - Remeasurement gains and losses for FY 2000–20 show substantial year-to-year variation but tend to offset over time.
  - Going forward, pension-related gains and losses are expected to remain unpredictable and can translate into volatility in the Fund’s income and reserves.
- Sensitivity analysis (illustrative scenarios for FY 2021–22 net income projections):
  - Projections are sensitive to changes in the discount rate and asset returns; for example, scenarios consider rising discount rates (from 2.71 percent to 3.21 percent by the end of FY 2021) and variations in asset returns.

*Source: Review of the Fund’s Income Position for FY 2020 and FY 2021–2022 (selected excerpts).*

### 3.71 percent by the end of FY 2022) and asset gains (10 percent annual returns), the pension

### REVIEW OF THE FUND’S INCOME POSITION FOR FY 2020 AND FY 2021–2022―SUPPLEMENTARY INFORMATION

### Executive summary and updates
- Supplement updates the Review of the Fund’s Income Position for FY 2020 and FY 2021–2022 (4/13/20) to reflect developments in March and early April; updates do not alter the main conclusions.
- Date on supplement: April 21, 2020.
- Prepared by the Finance Department in consultation with Legal, Secretary's, and Strategy, Policy, & Review Departments, the Office of Budget and Planning, and the Office of Risk Management.
- Approved by Andrew Tweedie.
- The supplement notes that a net income loss of about SDR 1 billion is now projected for FY 2020 in the GRA (compared with prior projection in the April 13 staff paper).

### Pension discount rate and asset return sensitivity scenarios
- Illustrative favorable scenario:
  - Discount rate: 3.71 percent by the end of FY 2022.
  - Asset gains: 10 percent annual returns.
  - Result: pension expense would decrease, raising projected overall net income to SDR 3.2 billion by the end of FY 2021 and SDR 3.7 billion by the end of FY 2022.
- Illustrative adverse scenario:
  - Discount rates: 2.21 percent at the end of FY 2021 and 1.71 percent by the end of FY 2022.
  - Asset returns: 2 percent annual returns.
  - Result: pension expense would increase, reducing projected net income to SDR 0.6 billion by the end of FY 2021 and SDR 0.9 billion by the end of FY 2022.
- The scenarios are purely illustrative, analyzing sensitivity of the baseline to discount rate and asset return changes while keeping other key financial and demographic assumptions constant.

### Impact of a 100 basis point change in the discount rate
- The supplement shows the impact on net income projections of a more substantial change in the discount rate of 100 basis points (i.e., by an additional 50 basis points) in FY 2021 and FY 2022 (illustrative analysis in Figure A2.2).

### Investment Account (IA) performance scenarios — overview
- The IA comprises two subaccounts with distinct objectives and strategies: Fixed-Income Subaccount (FI) and Endowment Subaccount (EA).
- The annex illustrates the range of expected investment returns based on different market scenarios and uses stochastic simulation to derive distributions of expected return projections and ex-ante risk statistics.

### Fixed-Income Subaccount (FI) findings
- Investment objective: achieve returns in excess of the 3-month SDR interest rate over a three- to four-year horizon.
- Portfolio structure:
  - Invested in highly-rated liquid fixed-income instruments across two tranches: a short duration actively-managed tranche and a longer duration passively-managed tranche.
  - Current portfolio duration: approximately 1.5 years.
- Market context:
  - Since last year, SDR government bond yields have declined by around 75 basis points on average; longer maturity yields are close to historic lows with an inverted yield curve.
  - Low government bond yields imply lower coupon income over time and less protection for the FI against rising yields.
- Yield curve scenarios used:
  - (i) yields remain unchanged from current levels; and
  - (ii) yields move in line with market implied forward rates.
- Projected outcomes:
  - Under the forwards scenario, FI returns are projected to be higher than the 3-month SDR interest rate over a 5-year horizon; excess returns would be around 12 bp.
  - Under the unchanged-yields (inverted curve) scenario, excess returns relative to the 3-month SDR rate would be negative.
- One-year horizon risk-return observations:
  - Downside risks remain moderate, but lower yield levels provide less protection against rising interest rates.
  - Annual investment income from the FI is expected to fall within the range of SDR 5 million to SDR 155 million (estimated based on a portfolio size of SDR 16.7 billion and one standard deviation around the average projected return under the unchanged yields and forwards scenario).
  - Under an adverse scenario where yields rise sharply by around 55 bp from current levels, the 1-year return would be close to zero; if yields rise beyond that level the FI is likely to record a negative return.
  - Estimated worst-case loss: about -0.9 percent (proxied by the 95 percent conditional value at risk (CVaR)), equivalent to an SDR 150 million loss.

### Endowment Subaccount (EA) findings
- Investment objective: generate a long-term real rate of return of 3 percent in US dollar terms.
- Strategic Asset Allocation (SAA):
  - At least 90 percent of the EA is invested passively following SAA with a 60/40 percent split between global fixed-income and equity.
  - SAA asset mix (visualized): Equities and REITs vs Fixed-Income split; specifics in the source show allocations such as 40% DM Equities, 25% EM Equities, 10% REITs, 5% Infrastructure Debt, 5% EM Bonds, 5% US TIPs, 20% DM Corporate Bonds, 15% DM Sovereign Bonds (as represented in the figure).
  - Actively managed portion initially only 5 percent (managed in same asset classes as passive but with wide deviation bands).
- Risk and return characteristics:
  - Diverse SAA increases probability of meeting the 3 percent real target over long run, but produces higher short-term return volatility compared to FI.
  - EA carries higher interest rate, currency and credit risks given fixed-income assets duration of around 6 years and allocations to global equities, REITs, emerging market and corporate bonds.
- Forward-looking simulation results (central market scenario):
  - The 3 percent real return target is likely to remain challenging to achieve in the medium term.
  - Average expected nominal returns in U.S. dollars: between 3.3 percent and 4.4 percent over a 5- and 15-year horizon respectively (approximately 1.3 and 2.5 percent in real terms).
  - Estimated worst-case annual loss (based on CVaR): around 12 percent, equivalent to 990 million in U.S. dollar terms or 720 million in SDR terms.
- Additional EA risk-return statistics (from simulated results reported):
  - Medium-term (5-year) Avg. Expected Nominal Return: 3.3%
  - Long-term (15-year) Avg. Expected Nominal Return: 4.4%
  - Standard Deviation (both horizons): 8.3%
  - Reward-to-risk Ratio: 0.40 (5-year), 0.53 (15-year)
  - VaR Return (95%): -9.8% (5-year), -8.7% (15-year)
  - CVaR Return (95%): -12.5% (5-year), -11.5% (15-year)
  - Probability of Underperforming Real Return Target: Medium-term and Long-term probabilities shown in figure (e.g., 68.4%, 65.2%, 60.0%, etc. as presented in the source figure).

### Assumptions underlying income projections (selected key figures)
- Table of assumptions (in billions of SDRs, unless otherwise stated) includes actual through Feb. 2020 and projections for FY 2020–FY 2022. Selected items:
  - Purchases (excl. reserve tranche purchases): Actual through Feb. 2020 = 8.3; FY 2020 = 28.1; FY 2021 = 11.8; FY 2022 = 3.3.
  - Repurchases: Actual through Feb. 2020 = 6.1; FY 2020 = 6.9; FY 2021 = 3.2; FY 2022 = 10.7.
  - Average balances subject to charges: Actual through Feb. 2020 = 66.6; FY 2020 = 67.3; FY 2021 = 92.6; FY 2022 = 91.0.
  - Average SDR holdings: Actual through Feb. 2020 = 22.1; FY 2020 = 22.1; FY 2021 = 22.7; FY 2022 = 23.6.
  - Average remunerated positions: Actual through Feb. 2020 = 71.4; FY 2020 = 72.5; FY 2021 = 100.1; FY 2022 = 101.4.
  - Average investment account assets – Fixed-Income subaccount: Actual through Feb. 2020 = 16.6; FY 2020 = 16.6; FY 2021 = 16.5; FY 2022 = 17.0.
  - Average investment account assets – Endowment subaccount: Actual through Feb. 2020 = 5.6; FY 2020 = 5.6; FY 2021 = 5.7; FY 2022 = 5.8.
  - Average borrowings and issued notes: Actual through Feb. 2020 = 11.6; FY 2020 = 11.1; FY 2021 = 8.4; FY 2022 = 6.4.
  - Return on investments – Fixed-Income subaccount: Actual through Feb. 2020 = 1.54; FY 2020 = 1.81; FY 2021 = 0.28; FY 2022 = 0.57.
  - Return on investments – Endowment subaccount (SDR terms): Actual through Feb. 2020 = 4.47; FY 2020 = 3.03; FY 2021 = 3.30; FY 2022 = 2.57.
- Average interest rates (in percent):
  - SDR interest rate and basic rate of remuneration: Actual through Feb. 2020 = 0.9; FY 2020 = 0.8; FY 2021 = 0.1; FY 2022 = 0.2.
  - Basic rate of charge: Actual through Feb. 2020 = 1.9; FY 2020 = 1.8; FY 2021 = 1.1; FY 2022 = 1.2.
  - Margin on the rate of charge: 1.0 in each period shown.

### Consolidated medium-term income and expenses — baseline and scenarios
- Consolidated Income and Expenses presented for FY 2020–30 under a Baseline Scenario with scenario notes:
  - Projections assume a premium of 50 basis points over the SDR rate is attained in the longer run.
  - Baseline projections assume a 1 percent payout from the gold endowment commencing in FY 2021.
  - Illustrative scenarios for FY 2030: Scenario B assumes continued payout of 1 percent in a low investment return environment; Scenario A assumes higher payout of 1.5 percent in a high investment return environment.
- Selected items and figures (SDR millions unless noted):
  - A. Operational income (FY20 through FY30 shown): FY20 = 2,350; FY21 = 2,145; FY22 = 2,592; FY23 = 1,924; FY24 = 1,188; FY25 = 836; FY26 = 613; FY30 (Scenario A) = 881; FY30 (Scenario B) = 652.
  - Lending income (subset of operational income): FY20 = 1,942; FY21 = 1,968; FY22 = 2,354; FY23 = 1,631; FY24 = 883; FY25 = 500; FY26 = 275; FY30 (A) = 247; FY30 (B) = 247.
  - Investment income (E. panel): FY20 = 411; FY21 = 144; FY22 = 217; FY23 = 281; FY24 = 301; FY25 = 336; FY26 = 338; FY30 (A) = 674; FY30 (B) = 411.
  - Net operational income (loss) after pension-related (IAS 19) adjustment (panel D/C): examples include FY20 = -804; FY21 = 1,240; FY22 = 1,663; FY23 = 973; FY24 = 217; FY25 = -152; FY26 = -391; FY30 (A) = -159; FY30 (B) = -388.
  - Net income (loss) (panel labeled Net income (loss)): FY20 = -637; FY21 = 1,370; FY22 = 1,754; FY23 = 1,108; FY24 = 312; FY25 = 56; FY26 = -221; FY30 (A) = 0; FY30 (B) = -388.
- Memorandum items:
  - Fund credit (average stock, SDR billions): FY20 = 67.3; FY21 = 92.6; FY22 = 91.0; FY23 = 77.1; FY24 = 53.0; FY25 = 30.5; FY26 = 18.0; FY30 = 20.0.
  - SDR interest rate (in percent): FY20 = 0.8; FY21 = 0.1; FY22 = 0.2; FY23 = 0.3; FY24 = 0.3; FY25 = 0.4; FY26 = 0.4; FY30 (baseline long-run) = 2.0; FY30 (alternative) = 1.0.
  - US$/SDR exchange rate: FY20 = 1.38; FY21 = 1.40; FY22 = 1.41; FY23 = 1.41; FY24 = 1.42; FY25 = 1.43; FY26 = 1.43; FY30 = 1.50.

### Reconciliation of projected income and expenses — FY 2020
- Purpose: reconcile analytical framework (Table A6.1) with the traditional IFRS income statement format; framework nets financing costs (remuneration and interest on borrowings) against income from Fund credit and GRA SDR holdings to derive income from the margin and interest free resources.
- Key reallocation adjustments include:
  - Reallocation of surcharges from interest and charges.
  - Reallocation of income from the Endowment Subaccount from total investment income since this amount is retained in the investment account.
  - Separation of reimbursements and pension related (IAS 19) gains/(losses) from administrative expenses.
- Reconciliation headline numbers (Actual through Jan. 2020 vs FY2020 Current Projection):
  - A. Operational income: Actual through Jan. 2020 = 2,715; FY2020 Current Projection = 3,090 (breakdown includes interest and charges, interest on SDR holdings, net income from investments, service charges and commitment fees).
  - B. Operational expenses: Actual through Jan. 2020 = 1,340; FY2020 Current Projection = 1,645 (includes remuneration, interest expense on borrowings, administrative expenses).
  - C. Net income (IFRS presentation): Actual through Jan. 2020 = 1,374; FY2020 Current Projection = -637.
  - Other reconciling items: Surcharges = 756; Reimbursements = 65; Pension and other benefits related (IAS 19) gains/(losses) = -2,082 (Actual through Jan. 2020) and -2,252 (FY2020 Current Projection); Endowment Subaccount investment income = 167.
- The analytical presentation yields a net income result consistent with the IFRS-format reconciliation once these reallocations and adjustments are applied.

*International Monetary Fund — Review of the Fund’s Income Position for FY 2020 and FY 2021–2022 (Supplementary Information, April 21, 2020).*

### 0.8 billion previously, mainly reflecting a higher estimated pension-related (IAS 19) loss. The

### REVIEW OF THE FUND’S INCOME POSITION FOR FY 2020 AND FY 2021–2022―SUPPLEMENTARY INFORMATION

### Summary of FY 2020 income position
- A net loss of about SDR 1 billion is now projected for the GRA in FY 2020 compared with SDR 0.8 billion in the staff paper.
- Table 1 (FY2020 Supplement Projections) key aggregates:
  - A. Operational income: 2,251 (in millions of SDRs)
    - Lending income: 1,889
      - Margin for the rate of charge: 667
      - Service charges: 97
      - Commitment fees: 373
      - Surcharges: 752
    - Investment income: 253
      - Fixed-Income Subaccount (reserves): 253
      - Endowment Subaccount payout: 0
    - Interest free resources (SCA-1 and other): 44
    - Reimbursements: 65
  - B. Expenses: 895
    - Net administrative expenditures: 832
    - Capital budget items expensed: 18
    - Depreciation: 45
  - C. Net operational income (A-B): 1,356
  - Pension and other benefits related (IAS 19) losses: -2,375
  - D. Net operational income/(loss) after IAS 19 adjustment: -1,019
  - Endowment subaccount investment income: -126
  - Net income/(loss) position: -1,145
  - Fund credit (average stock, SDR billions): 66.7
  - SDR interest rate (average, in percent): 0.8
  - US$/SDR exchange rate (average): 1.38
  - Precautionary balances (end of period, SDR billions): 16.5

### Investment income — Fixed-Income and Endowment subaccounts
- Fixed-Income Subaccount (FI): Investment income now projected at SDR 253 million compared with SDR 298 million in the staff paper; updated projection reflects slightly negative portfolio returns in March due to a widening of credit spreads and mark-to-market losses on short-duration credit assets.
- Endowment Subaccount (EA): EA is expected to incur a loss in SDR terms of about SDR 126 million for FY 2020 compared with a gain of SDR 167 million estimated in the staff paper; cumulative retained earnings of the IA (all attributed to the EA) projected at about SDR 970 million.

### Pension-related (IAS 19) expense and reconciliation
- Updated pension-related expense for FY 2020 is slightly higher than the staff paper, with net actuarial remeasurement losses projected at SDR 2,204 million compared with SDR 2,083 million in the staff paper.
- Text Table reconciliation (Per Supplement / Per Staff Paper):
  - Total IAS 19 gains/(losses): -2,375 (Supplement) versus -2,252 (Staff Paper)
  - Remeasurement gains/(losses): -2,204 (Supplement) versus -2,083 (Staff Paper)
  - Discount rate change: -1,654 (Supplement) versus -2,228 (Staff Paper)
  - 'Excess return' on assets: -857 (Supplement) versus -206 (Staff Paper)
  - Discount rate - at end of period (in percent): 2.97 (Supplement) versus 2.71 (Staff Paper)
- Drivers and uncertainties:
  - Discount rate increased from 2.71 percent to 2.97 percent (based on actuaries’ estimate as of April 9), partially offsetting losses but remains 89 basis points below the level at the start of the year.
  - Asset remeasurement projected negative SDR 857 million compared with negative SDR 206 million in the staff paper, reflecting large market declines in March partially offset by early April recovery.
  - Considerable uncertainties remain relating to the discount rate to be used at April 30, 2020, and to full year asset returns.

### Lending income, reimbursements, and expenses
- Lending income FY 2020 projected at SDR 1.9 billion, slightly below the staff paper; slight decline mainly attributable to lower service charges as certain disbursements assumed for FY 2020 will be made after April 30.
- Emergency financing estimate: about SDR 32 billion as of April 14 (compared with about SDR 26 billion as of March 27); more than half of the additional financing expected to be disbursed in the next financial year, with minimal impact on FY 2020 lending income.
- Reimbursements: Expected to remain unchanged in FY 2020 in U.S. dollar terms.
- Expenses: FY 2020 net administrative budget outturn revised from full utilization of US$1,158 million to a US$10 million, or SDR 7 million, underspend.

### FY 2021–2022 income outlook and key risks
- Outlook sensitivity: Highly sensitive to future path for interest rates and new demand for Fund resources; uncertainties around intensity and duration of the Covid-19 crisis continue to impact near-term income outlook.
- Excluding the impact of the pension-related gain or loss (no projections beyond FY 2020), overall net income is projected at:
  - FY 2021: about SDR 1.4 billion
  - FY 2022: about SDR 1.8 billion
- Table 2 (Supplement projections) key items:
  - Operational income: FY2021 2,220; FY2022 2,571
  - Lending income: FY2021 2,039; FY2022 2,369
  - Investment income: FY2021 105; FY2022 124
    - Fixed-Income subaccount: FY2021 51; FY2022 69
    - Endowment subaccount payout: FY2021 54; FY2022 55
  - Net operational income (A-B): FY2021 1,296; FY2022 1,623
  - Net income position (excluding IAS 19 beyond FY 2020): FY2021 1,412; FY2022 1,745
  - Fund credit (average stock, SDR billions): FY2021 96.1; FY2022 95.1
  - SDR interest rate (average, in percent): FY2021 0.1; FY2022 0.1
  - Precautionary balances (end of period, SDR billions): FY2021 17.8; FY2022 19.4
- Key risks to income and finances:
  - Large new lending arrangements, cancellations, and changes in timing of purchases under existing arrangements.
  - Fluctuations in annual pension-related gain or loss as determined under IAS 19.
  - Uncertainties around global interest rate environment and U.S. dollar/SDR exchange rate path.
  - Low interest rate environment diminishing near-term contributions from investment income.
- Lending projections updated to reflect requests and inquiries as of April 14; margin income projected to increase over the medium term with addition of new RFI arrangements, offset by lower surcharge income due to cancellation/revision of two large arrangements.

### Margin for the rate of charge and reserve accumulation
- Reserve accumulation projected broadly in line with staff paper; precautionary balances now projected to decline to SDR 16.5 billion by end-FY 2020 (down from SDR 16.7 billion earlier) mainly due to the increased projected IAS 19 loss.
- Credit outstanding projected to peak at SDR 96 billion in FY 2021 and remain high through at least FY 2023.
- Indicative medium-term target for precautionary balances of SDR 20 billion still projected to be reached by FY 2023.
- Table 3 (Supplement) selected figures (in millions of US Dollars unless otherwise indicated):
  - A. Intermediation costs: FY2020 104 (Supplement)
  - B. Service charges: FY2020 193 (Supplement)
  - D. Income from margin (80 basis points): FY2020 737; FY2021 1,053; FY2022 1,050 (Supplement)
  - E. Commitment fees: FY2020 51 (Supplement)
  - F. Surcharges: FY2020 1,038; FY2021 1,251; FY2022 1,546 (Supplement)
  - G. Potential reserve accumulation (80 basis points): FY2020 2,319; FY2021 2,418; FY2022 2,892 (Supplement)
  - I. Actual reserve accumulation (80 basis points): FY2020 -1,590; FY2021 1,513; FY2022 1,978 (Supplement)
  - K. Precautionary balances at the end of FY (in SDR billions, 80 basis points): FY2020 16.4; FY2021 17.6; FY2022 19.2 (Supplement)
  - Memorandum: Average Fund credit outstanding (in SDR billions): FY2020 66.7; FY2021 96.1; FY2022 95.1 (Supplement)
  - Average exchange rate US$/SDR: FY2020 1.38; FY2021 1.37; FY2022 1.38 (Supplement)

*International Monetary Fund.*

### 9. Staff’s assessment of the alignment of the margin has not changed since end-February.

### 9. Staff’s assessment of the alignment of the margin has not changed since end-February.

### Alignment of the margin
- The key indicator for this analysis (composite EMBI spread) is assessed on the basis of 5-year rolling medians, which remain broadly unchanged even with the inclusion of the recent spike in spreads in March and April.

### Exceptional Circumstances Clause and lending margin outlook
- Updated estimates suggest that the lending margin will continue to be set under the exceptional circumstances clause for the foreseeable future.
- Non-lending income (consisting of investment income and implicit income from interest free resources) is projected to be mostly lower over the medium term than the estimate in the staff paper, covering about 28 percent of the Fund’s non-lending administrative expenses by FY 2026 (Figure 2).
- The projected burden sharing adjustment rates for FY 2020 are slightly lower than estimated in the staff paper (Table 4).
- The burden sharing adjustment rate is projected to be lower in Q4 FY 2020 following the recent clearance of Somalia’s arrears, resulting in a lowering of the average rates projected for the year.

### Projected non-lending operational income and non-lending expenses (Figure 2)
- Non-lending operational income comprises investment income and implicit income from interest free resources. Baseline projection assumes 1 percent payout from the Endowment Subaccount commencing in FY 2021. Alternative projection assumes 1.5 percent payout.
- Non-lending expenses are net administrative expenditures less intermediation costs related to generally available facilities, PRGT and SDR Department.
- Chart components (labels preserved):
  - Coverage ratio (percent)
  - Amount (SDR million)
  - Non-lending expenses
  - Non-lending income
  - Coverage ratio (RHS)
  - Coverage ratio, alternative (RHS)
  - Coverage ratio, EBS/20/58 (RHS)
  - Staff Projections

### Burden sharing adjustment rates (Table 4) — selected indicators and notes
- Selected historical/technical items (preserved formatting and notes):
  - Rate of Remuneration ¹: Deferred charges – – 2 – 2 0.300 0.575 0.375 0.500 0.500 0.225 (FY13–FY20 Projected context)
  - Rate of Charge ¹: Deferred charges – – 2 – 2 – – 0.150 0.500 0.500 0.275
  - Average SDR interest rate (in percent): 0.09 ... 0.061 0.051 0.187 0.678 1.037 0.763 (presented across FYs)
  - Average basic rate of charge (in percent): 1.09 ... 1.061 1.051 1.187 1.678 2.037 1.763
- Table footnotes preserved:
  - ¹ The average rates have been calculated using the quarterly burden sharing rates and SDR interest rates. No adjustments to the rate of charge in FY 2015, FY 2016, and the first two quarters in FY 2017.
  - ² Annual average rate calculated is less than 0.5 basis points. (prior to October 2014, the minimum burden sharing adjustment rate was set at 1 basis point).
  - ³ In October 2014, the minimum for the quarterly burden sharing rate adjustment of 1 basis point was reduced to 0.1 basis point.

### Annex I — Investment Account (IA) Performance: Endowment Subaccount (EA)
- Market environment and EA positioning:
  - Equity markets have fallen significantly since February due to COVID-19; returns on equity and real estate markets were all in negative territory for the IMF’s current fiscal year to the end of March.
  - Investors’ flight to government bonds and central banks’ policy responses supported fixed-income investments.
- EA strategy and composition:
  - EA established with a “conservative diversified” strategy to provide income while preserving long-term real value.
  - Asset allocation maintains a large exposure to fixed income with a notable allocation (20 percent) to inflation-linked bonds (US TIPs).
  - Passive arrangements for the corporate bond allocation target a fixed average credit quality higher than the market average.
- Performance outcomes:
  - US TIPs have performed less well than nominal bonds given declining inflation expectations, but outperformed equities in the recent sell-off.
  - The EA’s corporate bond investments have suffered fewer downgrades and performed better than a market-capitalization weighted index.
  - Given the scale of the equity market sell-off, the EA return for the fiscal year is likely to be negative. At the end of March, the subaccount’s return for the fiscal year stood at -4.11 percent, in USD terms.
  - The EA’s annualized real return since inception is now just over 1 percent.
  - The EA’s long-term real return target of 3 percent remains challenging in an environment with bond yields at historically low levels.
- EA asset-class return highlights (Figure A1.1 — selected entries preserved):
  - DM Sov. Bonds average: 4.4 (and annual entries such as 5.8, 6.9, 3.3, ... , 9.6)
  - US TIPs 0-10 Y average: 4.7 (annual entries such as 10.2, -0.7, 8.1, ... , 3.9)
  - EM Bonds average: 7.0 (annual entries including 3.0, -1.6, 23.5, ... , 0.7)
  - Corporate Bonds average: 4.9 (annual entries including 1.5, -4.0, 19.8, ... , 2.4)
  - DM Equities and EM Equities and REITs series with historical annual entries preserved as shown.

### Annex I — Investment Account (IA) Performance: Fixed-Income Subaccount (FI)
- Market conditions and FI exposures:
  - Central banks’ emergency responses drove SDR weighted government bond yields to historically low levels. Two-year SDR government bond yields are currently around 9 bps, only marginally above the SDRi floor of 5bps.
  - Drop in yields benefited the FI’s SDR government bond holdings.
  - Many investors sold short-dated credit assets, causing dramatic widening of credit spreads and mark-to-market losses on short-duration credit assets, although losses are expected to be temporary.
- FI strategy and outcomes:
  - FI strategy with two-tranche structure (Tranche 1: short-duration credit exposure; Tranche 2: longer duration buy-and-hold investments in highly-rated government bonds) balanced outcomes.
  - Mark-to-market losses in Tranche 1 were offset by gains on longer duration government bonds in Tranche 2.
  - Flexibility in Tranche 1 allowed managers to pursue distinct strategies which enhanced diversification and permitted rapid adjustment to market conditions.
  - FI is likely to achieve an overall positive return for the fiscal year and maintain a solid margin above the SDRi.
  - For the fiscal year through the end of March, the FI had generated a return of 1.45 percent, 69 bps greater than the average SDRi.

### Annex II — Assumptions Underlying the Income Projections (selected table entries)
- Table context: Assumptions Underlying the Income Projections (in billions of SDRs, unless otherwise stated).
- Selected actuals and projections (Actual through Mar. 2020; FY2020; FY2021; FY2022):
  - 1. Purchases (excl. reserve tranche purchases): 8.6; 19.5; 24.9; 2.5
  - 2. Repurchases: 6.6; 6.9; 3.2; 10.7
  - 3. Average balances subject to charges: 66.5; 66.7; 96.1; 95.1
  - 4. Average SDR holdings: 22.1; 22.1; 22.3; 23.3
  - 5. Average remunerated positions: 71.5; 71.9; 102.7; 104.6
  - 6. Average investment account assets-Fixed-Income subaccount: 16.6; 16.6; 16.5; 16.8
  - 7. Average investment account assets-Endowment subaccount: 5.4; 5.4; 5.4; 5.5
  - 8. Average borrowings and issued notes: 11.3; 11.1; 8.4; 6.3
  - Return on investments-Fixed-Income subaccount 1: 1.45; 1.53; 0.31; 0.41
  - Return on investments-Endowment subaccount 1, 2: -2.74; -2.30; 3.16; 3.22
  - Average interest rates (in percent):
    - SDR interest rate and basic rate of remuneration: 0.8; 0.8; 0.1; 0.1
    - Basic rate of charge: 1.8; 1.8; 1.1; 1.1
    - Margin on the rate of charge: 1.0; 1.0; 1.0; 1.0
- Notes preserved:
  - 1 End-March figure is unannualized.
  - 2 The projected returns for the Endowment Subaccount is shown in SDR terms.

### Annex III — Consolidated Medium-Term Income and Expenses (Baseline and scenarios)
- Key scenario assumptions and labels preserved:
  - The current medium-term projections are conservative and assume that a premium of 50 basis points over the SDR rate is attained in the longer run.
  - Baseline projections assume a 1 percent payout from the gold endowment commencing in FY 2021. Illustrative scenarios for FY 2030: Scenario B assumes continued payout of 1 percent in a low investment return environment; Scenario A assumes a higher payout of 1.5 percent in a high investment return environment.
  - Interest free resources description preserved: Interest free resources reduce the Fund’s costs and therefore provide implicit returns. The retained interest free resources in the GRA are mainly attributable to the SCA-1, unremunerated reserve tranche positions not represented by gold holdings, and GRA income for the year not transferred to the IA.
- Selected baseline consolidation excerpts (Low-lending environment / Scenario A / Scenario B — selected rows preserved):
  - A. Operational income (FY20–FY30 excerpts): 2,251 2,220 2,571 1,907 1,182 796 638 883 648
  - Lending income (A, FY20–FY26 excerpts): 1,889 2,039 2,369 1,643 890 453 225 247 247
    - Margin for the rate of charge entries: 667 961 951 809 566 314 164 200 200
    - Service charge entries: 97 125 135 100 23 23
    - Commitment fees entries: 37 34 02 85 00 00 24 24
    - Surcharges entries: 75 29 13 1,120 829 323 139 610 0
  - Investment income (A): 253 105 124 170 190 226 289 449 269
    - Fixed-Income Subaccount: 253 5 169 114 133 168 230 348 209 (note: formatting preserved as in source)
    - Gold endowment pay-out 2/: 0 54 55 56 57 58 59 10 16 0
  - Interest free resources 3/: 4 47 82 33 04 34 9 11 0 55
  - B. Expenses (FY20–FY30 excerpts): 895 924 948 970 990 1,014 1,024 1,040 1,040
    - Net administrative budget: 832 866 885 900 914 940 950 971 971
    - Capital budget items expensed: 18 99 91 01 01 01 11 11
    - Depreciation: 45 49 54 61 66 64 64 58 58
  - C. Net operational income (loss) (A-B): 1,356 1,296 1,623 937 192 -218 -386 -157 -392
  - D. Pension and other benefits related (IAS 19) loss: -2,375 0 0 0 0 0 0 0 0
  - Net operational income (loss) after pension-related (IAS 19) adjustment (C-D): -1,019 1,296 1,623 937 192 -218 -386 -157 -392
  - Endowment (Gold Profits) Subaccount: -126 116 122 123 121 177 175 159 -115
  - Net income (loss): -1,145 1,412 1,745 1,060 313 -41 -211 2 -507
- Expanded consolidated scenario panel (E–G) and memorandum items preserved with selected entries:
  - E. Operational income (alternate series): 3,106 3,040 3,546 2,630 1,644 1,107 892 1,324 971
  - F. Expenses (alternate series): 1,234 1,266 1,308 1,340 1,376 1,410 1,434 1,559 1,559
  - G. Net operational income (E-F): 1,872 1,774 2,238 1,290 268 -303 -542 -235 -588
  - Memorandum Items (selected):
    - Fund credit (average stock, SDR billions): 66.7 96.1 95.1 80.9 56.6 31.4 16.4 20.0 20.0
    - SDR interest rate (in percent): 0.8 0.1 0.1 0.3 0.4 0.6 0.7 2.0 1.0
    - US$/SDR exchange rate: 1.38 1.37 1.38 1.38 1.39 1.39 1.40 1.50 1.50
    - Precautionary balances (end of period, SDR billions): 16.5 17.8 19.4 20.4 20.6 20.3 20.0 15.0 15.0

*Source: REVIEW OF THE FUND’S INCOME POSITION FOR FY 2020 AND FY 2021–2022—SUPPLEMENTARY INFORMATION.*

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_Source: https://www.imf.org/-/media/files/publications/pp/2020/english/ppea2020037.pdf_