## _112311 - Section 1

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### Executive summary
- First review of the interest rate mechanism approved under the 2009 reforms of the Fund’s concessional lending facilities; reviews required every two years, first due by December 31, 2011.
- 2009 Board-endorsed temporary relief: all interest payments on PRGT loans waived through end-December 2011; rate of charge on subsidized ENDA and EPCA credits subsidized to zero through end-January 2012.
- As of November 11, 2011, the interest waiver had benefited 18 PRGT-eligible members and one member that graduated from PRGT eligibility in 2010.
- Combining interest waived to November 11, 2011, and projected payments for the remaining period of the waiver, total cost to the Fund amounts to SDR 5.8 million.
- Staff recommendation: extend the exceptional interest waiver by one year to end-December 2012 as a transitional measure in view of severe downside risks to the global outlook; allow the differentiated PRGT interest rate mechanism to operate thereafter.
- Under the proposed transitional approach, applicable interest rates in 2013 would be:
  - 0.0 percent on all ECF and RCF loans,
  - 0.25 percent for SCF loans.
- Outstanding ESF loans and subsidized ENDA/EPCA credits would carry an interest rate of 0.25 percent after the interest waiver expires.
- Next review of PRGT interest rates to take place by December 31, 2013 (in accordance with PRGT Instrument).

### Introduction and context
- The PRGT interest rate mechanism introduced in 2009 links the PRGT interest rate structure to world interest rates (as reflected in the SDR interest rate) and sets differentiated rates across PRGT facilities.
- The framework sets interest rates for outstanding balances under each PRGT facility and requires a review every two years.
- The temporary interest relief became effective on January 7, 2010, as part of LIC facility reforms, intended as exceptional support during the global economic crisis.
- Executive Board discussions in April and September 2011 considered whether to extend the exceptional interest relief; Directors agreed to consider extension in the context of the scheduled PRGT interest rate review.

### PRGT lending interest rate mechanism and recent rates
- Design objectives:
  - (i) make financing term structure more concessional in the near term of low global rates;
  - (ii) preserve concessional resources;
  - (iii) tailor financing to LIC needs and capacities;
  - (iv) limit fluctuations in concessionality and subsidy costs.
- Mechanism: review-based adjustments normally every two years based on the 12-month average SDR interest rate.
- SDR interest rate history and recent level:
  - The SDR rate fell from about 3 percent in August 2008 to below 1 percent in December 2008 and has since remained below 1 percent.
  - The 12-month average SDR rate has been below the 2 percent lower bound in the mechanism since March 2009 and was 0.4 percent as at the latest available date (November 18).
- Interest rate mechanism (Interest rate for concessional facility; in percent):
  - If SDR rate < 2.0: ECF 0.0, RCF 0.0, SCF 0.25.
  - If 2 ≤ SDR rate ≤ 5: ECF 0.25, RCF 0.25, SCF 0.50.
  - If SDR rate > 5: ECF 0.50, RCF 0.50, SCF 0.75.
  - Note: average SDR rate is based on the most recently observed 12-month period.
- Application for 2012–2013 under the new mechanism:
  - Zero rate on all ECF and RCF loans and 0.25 percent for SCF loans for the period January 1, 2012 to end-December 2013.
  - The mechanism does not extend to outstanding pre-2010 ESF credits or subsidized ENDA/EPCA; these would carry 0.25 percent when exceptional relief expires.
  - An interest rate equal to the SDR rate would be charged on amounts of any overdue interest on, or overdue repayments of, PRGT loans.
- PRGT credit outstanding (in millions of SDRs; as of November 11, 2011, excluding arrears):
  - ECF: 3,704
  - RCF: 139
  - SCF: 9
  - ESF: 1,070
  - Total: 4,922
- Implication: outstanding ECF and RCF loans amount to almost 80 percent of all current PRGT loans; ESF loans amount to SDR 1,070 million and would bear 0.25 percent when exceptional relief expires.

### Temporary waiver of interest payments: implementation, coverage, and cost
- Suspension details:
  - Interest payments by PRGT-eligible members on all outstanding PRGT loans waived through December 2011.
  - Subsidization of rate of charge to zero percent for subsidized ENDA/EPCA through January 2012.
  - The suspension was envisaged as a one-off measure to help LICs address the global crisis.
- Rationale and LIC conditions in 2009:
  - LICs already affected by 2008 food and fuel price hikes were hit hard by the global crisis in 2009.
  - 2009 averages across LICs: average GDP growth fell to its lowest level in 15 years; fiscal deficits increased by 2.7 percentage points on average to 4.7 percent of GDP; average exports fell by 8.6 percent, resulting in significant deterioration in external positions.
  - PRGT borrowers suffered more: on average, real GDP growth declined to 2 percent (its lowest level in 16 years), fiscal deficits increased by 3.3 percent of GDP and exports declined by 8.2 percent.
- Coverage and monetary amounts of the temporary waiver (combines actual amounts Jan 8, 2010 to Nov 11, 2011 and projected estimates for the remaining waiver period):
  - Country-level breakdown (In thousands of SDRs): [selected entries]
    - Bangladesh: ESF 647.9; Total 647.9
    - Cameroon: SCF 459.8; Total 459.8
    - Congo, Dem. Rep. of: SCF 566.4; Total 566.4
    - Ethiopia: SCF 793.4; Total 793.4
    - Kenya: SCF 672.0; Total 672.0
    - Mozambique: SCF 545.9; Total 545.9
    - Tanzania: SCF 1,062.1; Total 1,062.1
    - Solomon Islands: SCF 24.2; Total 24.2
    - Total (aggregate): SCF 24.2; ESF 5,121.5; ENDA/EPCA 667.7; Total 5,813.4 (In thousands of SDRs)
- Cost comparison:
  - Total subsidy resources needed for the temporary waiver: SDR 5.8 million.
  - By contrast, all interest payments on PRGT loans in 2009 amounted to SDR 21.8 million; the lower cost reflects the reduced interest rates introduced by the LIC facility reforms.

### Macroeconomic recovery, remaining weaknesses, and risk assessment
- Recovery since the crisis:
  - Average growth rates, exports, and remittances have returned to pre-crisis levels.
  - Fiscal adjustment that started in 2010 halted subsequently, with the median fiscal deficit of net oil importers remaining at around 3 percent of GDP.
  - Current account deficits (net of FDI) have widened since the crisis, especially for net oil importers.
  - Reserve coverage, boosted by the 2009 SDR allocation (which increased reserve coverage of the median LIC by about 0.4 months of imports), has declined more recently, particularly in LICs with pegged exchange rate regimes.
  - A Vulnerability Exercise for LICs (VE-LIC) concluded limited progress in rebuilding macroeconomic policy buffers since the crisis.
- Risk assessment:
  - Global downside risks are now severe.
  - LICs’ lower buffers render them more vulnerable than during the previous crisis.
  - Scope for fiscal stimulus is likely to be more limited than in the past; financing needs could rise sharply in a renewed downturn.
  - Given dim prospects for a significant expansion of aid budgets, Fund support could be particularly important for members to mitigate a downturn, including through concessional borrowing.

### Staff proposal and implications
- Staff proposes:
  - Extend the exceptional interest waiver by one year to end-December 2012 as a transitional measure.
  - Allow the differentiated PRGT interest rate mechanism to operate as envisaged after the extended waiver expires.
- Under the proposed schedule:
  - Applicable interest rates in 2013 would be 0.0 percent on all ECF and RCF loans, and 0.25 percent for SCF loans.
  - Outstanding ESF loans and subsidized ENDA/EPCA credits would carry an interest rate of 0.25 percent after the waiver expires.
  - The next review of PRGT interest rates would take place by December 31, 2013 (per PRGT Instrument).

*Prepared by the Finance and the Strategy, Policy, and Review Departments (in consultation with the Legal Department); Approved by Andrew Tweedie and Siddharth Tiwari; November 23, 2011.*

### Section 1

### _112311 - Section 1

### Executive summary
- First review of the interest rate mechanism approved under the 2009 reforms of the Fund’s concessional lending facilities; reviews required every two years, first due by December 31, 2011.
- 2009 Board-endorsed temporary relief: all interest payments on PRGT loans waived through end-December 2011; rate of charge on subsidized ENDA and EPCA credits subsidized to zero through end-January 2012.
- As of November 11, 2011, the interest waiver had benefited 18 PRGT-eligible members and one member that graduated from PRGT eligibility in 2010.
- Combining interest waived to November 11, 2011, and projected payments for the remaining period of the waiver, total cost to the Fund amounts to SDR 5.8 million.
- Staff recommendation: extend the exceptional interest waiver by one year to end-December 2012 as a transitional measure in view of severe downside risks to the global outlook; allow the differentiated PRGT interest rate mechanism to operate thereafter.
- Under the proposed transitional approach, applicable interest rates in 2013 would be:
  - 0.0 percent on all ECF and RCF loans,
  - 0.25 percent for SCF loans.
- Outstanding ESF loans and subsidized ENDA/EPCA credits would carry an interest rate of 0.25 percent after the interest waiver expires.
- Next review of PRGT interest rates to take place by December 31, 2013 (in accordance with PRGT Instrument).

### Introduction and context
- The PRGT interest rate mechanism introduced in 2009 links the PRGT interest rate structure to world interest rates (as reflected in the SDR interest rate) and sets differentiated rates across PRGT facilities.
- The framework sets interest rates for outstanding balances under each PRGT facility and requires a review every two years.
- The temporary interest relief became effective on January 7, 2010, as part of LIC facility reforms, intended as exceptional support during the global economic crisis.
- Executive Board discussions in April and September 2011 considered whether to extend the exceptional interest relief; Directors agreed to consider extension in the context of the scheduled PRGT interest rate review.

### PRGT lending interest rate mechanism and recent rates
- Design objectives: (i) make financing term structure more concessional in the near term of low global rates; (ii) preserve concessional resources; (iii) tailor financing to LIC needs and capacities; (iv) limit fluctuations in concessionality and subsidy costs.
- Mechanism: review-based adjustments normally every two years based on the 12-month average SDR interest rate.
- SDR interest rate history and recent level:
  - The SDR rate fell from about 3 percent in August 2008 to below 1 percent in December 2008 and has since remained below 1 percent.
  - The 12-month average SDR rate has been below the 2 percent lower bound in the mechanism since March 2009 and was 0.4 percent as at the latest available date (November 18).
- Interest rate mechanism (Interest rate for concessional facility; in percent):
  - If SDR rate < 2.0: ECF 0.0, RCF 0.0, SCF 0.25.
  - If 2 ≤ SDR rate ≤ 5: ECF 0.25, RCF 0.25, SCF 0.50.
  - If SDR rate > 5: ECF 0.50, RCF 0.50, SCF 0.75.
  - Note: average SDR rate is based on the most recently observed 12-month period.
- Application for 2012–2013 under the new mechanism:
  - Zero rate on all ECF and RCF loans and 0.25 percent for SCF loans for the period January 1, 2012 to end-December 2013.
  - The mechanism does not extend to outstanding pre-2010 ESF credits or subsidized ENDA/EPCA; these would carry 0.25 percent when exceptional relief expires.
  - An interest rate equal to the SDR rate would be charged on amounts of any overdue interest on, or overdue repayments of, PRGT loans.
- PRGT credit outstanding (in millions of SDRs; as of November 11, 2011, excluding arrears):
  - ECF: 3,704
  - RCF: 139
  - SCF: 9
  - ESF: 1,070
  - Total: 4,922
- Implication: outstanding ECF and RCF loans amount to almost 80 percent of all current PRGT loans; ESF loans amount to SDR 1,070 million and would bear 0.25 percent when exceptional relief expires.

### Temporary waiver of interest payments: implementation, coverage, and cost
- Suspension details:
  - Interest payments by PRGT-eligible members on all outstanding PRGT loans waived through December 2011.
  - Subsidization of rate of charge to zero percent for subsidized ENDA/EPCA through January 2012.
  - The suspension was envisaged as a one-off measure to help LICs address the global crisis.
- Rationale and LIC conditions in 2009:
  - LICs already affected by 2008 food and fuel price hikes were hit hard by the global crisis in 2009.
  - 2009 averages across LICs: average GDP growth fell to its lowest level in 15 years; fiscal deficits increased by 2.7 percentage points on average to 4.7 percent of GDP; average exports fell by 8.6 percent, resulting in significant deterioration in external positions.
  - PRGT borrowers suffered more: on average, real GDP growth declined to 2 percent (its lowest level in 16 years), fiscal deficits increased by 3.3 percent of GDP and exports declined by 8.2 percent.
- Coverage and monetary amounts of the temporary waiver (combines actual amounts Jan 8, 2010 to Nov 11, 2011 and projected estimates for the remaining waiver period):
  - Country-level breakdown (In thousands of SDRs): [selected entries]
    - Bangladesh: ESF 647.9; Total 647.9
    - Cameroon: SCF 459.8; Total 459.8
    - Congo, Dem. Rep. of: SCF 566.4; Total 566.4
    - Ethiopia: SCF 793.4; Total 793.4
    - Kenya: SCF 672.0; Total 672.0
    - Mozambique: SCF 545.9; Total 545.9
    - Tanzania: SCF 1,062.1; Total 1,062.1
    - Solomon Islands: SCF 24.2; Total 24.2
    - Total (aggregate): SCF 24.2; ESF 5,121.5; ENDA/EPCA 667.7; Total 5,813.4 (In thousands of SDRs)
- Cost comparison:
  - Total subsidy resources needed for the temporary waiver: SDR 5.8 million.
  - By contrast, all interest payments on PRGT loans in 2009 amounted to SDR 21.8 million; the lower cost reflects the reduced interest rates introduced by the LIC facility reforms.

### Macroeconomic recovery, remaining weaknesses, and risk assessment
- Recovery since the crisis:
  - Average growth rates, exports, and remittances have returned to pre-crisis levels.
  - Fiscal adjustment that started in 2010 halted subsequently, with the median fiscal deficit of net oil importers remaining at around 3 percent of GDP.
  - Current account deficits (net of FDI) have widened since the crisis, especially for net oil importers.
  - Reserve coverage, boosted by the 2009 SDR allocation (which increased reserve coverage of the median LIC by about 0.4 months of imports), has declined more recently, particularly in LICs with pegged exchange rate regimes.
  - A Vulnerability Exercise for LICs (VE-LIC) concluded limited progress in rebuilding macroeconomic policy buffers since the crisis.
- Risk assessment:
  - Global downside risks are now severe.
  - LICs’ lower buffers render them more vulnerable than during the previous crisis.
  - Scope for fiscal stimulus is likely to be more limited than in the past; financing needs could rise sharply in a renewed downturn.
  - Given dim prospects for a significant expansion of aid budgets, Fund support could be particularly important for members to mitigate a downturn, including through concessional borrowing.

### Staff proposal and implications
- Staff proposes:
  - Extend the exceptional interest waiver by one year to end-December 2012 as a transitional measure.
  - Allow the differentiated PRGT interest rate mechanism to operate as envisaged after the extended waiver expires.
- Under the proposed schedule:
  - Applicable interest rates in 2013 would be 0.0 percent on all ECF and RCF loans, and 0.25 percent for SCF loans.
  - Outstanding ESF loans and subsidized ENDA/EPCA credits would carry an interest rate of 0.25 percent after the waiver expires.
  - The next review of PRGT interest rates would take place by December 31, 2013 (per PRGT Instrument).

*Prepared by the Finance and the Strategy, Policy, and Review Departments (in consultation with the Legal Department); Approved by Andrew Tweedie and Siddharth Tiwari; November 23, 2011.*

### Section 2

### _112311 - Section 2

### Context and key vulnerability estimate
- Note: All ratios to GDP exclude Timor-Leste.
- Managing Global Growth Risks and Commodity Price Shocks—Vulnerabilities and Policy Challenges for Low-Income Countries (9/21/11) indicates that a 1½ percentage point decline in global GDP growth could increase LICs’ financing needs in 2012 by US$27 billion.
- Staff references total cost for 2010–2011 as the basis for assessing the fiscal impact of extending the interest waiver, describing the additional cost for 2012 as modest.

### Staff recommendation on the temporary PRGT interest waiver (paragraphs 13–15)
- Staff recommends a short-term/temporary extension of the interest waiver through end-2012.
- Staff favor a limited one-year extension of the interest rate waiver as a transition measure, despite acknowledging that an extension would further delay the intended differentiation between the instruments—specifically that between the SCF and the other PRGT facilities.
- Rationale:
  - Continued exceptional interest relief would have a modest yet significant impact on payments by LICs with outstanding balances on SCF, ESF, and ENDA/EPCA credits, as well as new SCF disbursements.
  - Given the modest additional cost, a one-year extension would be consistent with the financing package approved in July 2009.
  - Staff’s latest projections of subsidy needs—presented in Update on the Financing of the Fund’s Concessional Assistance and Debt Relief to Low-Income Member Countries—incorporate the operation of the approved PRGT interest rate mechanism, underpinned by a gradual increase in global interest rates in line with World Economic Outlook (WEO) projections. On this basis, the revised interest rates would not require significant additional PRGT subsidy resources and the July 2009 financing package would remain sufficient to meet projected demand over the medium term.

### Proposed operational details if extension approved (paragraph 15)
- The temporary interest waiver for PRGT-eligible members would be extended for one further year and would expire at end-December 2012.
- Interest rates for the subsequent 12 months (i.e., for 2013) would revert to those currently implied by the interest rate mechanism, taking into account that the 12-month average SDR rate is currently below 2 percent. The interest rate mechanism would give rise to the following structure of interest rates for 2013:
  - zero percent for all ECF and RCF loans,
  - 0.25 percent for SCF loans.
- Outstanding ESF loans and subsidized ENDA/EPCA credits would carry an interest rate of 0.25 percent after the interest waiver expires.
- Consistent with Section II, Paragraph 4(b) of the PRGT Instrument, the next review of the interest rates on loans under the ECF, RCF, and SCF would be completed by December 31, 2013.

*Source: _112311 - Section 2*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/np/pp/eng/2011/_112311.pdf_