## PRGT Interest Rate Mechanism—Extension of Temporary Interest Rate Waiver

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**Canonical URL:** [PRGT Interest Rate Mechanism—Extension of Temporary Interest Rate Waiver](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/np/pp/eng/2012/_121412b.pdf)

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### Introduction
- The first bi-annual review under the Poverty Reduction and Growth Trust (PRGT) interest rate mechanism was completed by the Executive Board in December 2011.
- At that time, Executive Directors agreed to extend the exceptional interest rate waiver on concessional facilities by one year to end-December 2012.
- Recent Executive Board discussions have expressed support for a further extension of the temporary exceptional interest waiver to signal the Fund’s continued support for Low-Income Countries (LICs) amid downside risks to the global economic outlook.
- Staff proposal:
  - Extend the exceptional interest waiver by two years, to end-2014.
  - Further extend to April 2013 the existing subsidization of the rate of charge on outstanding Emergency Natural Disaster Assistance (ENDA) and Emergency Post-Conflict Assistance (EPCA) purchases by PRGT-eligible members.
  - Postpone the next scheduled review of PRGT interest rates to December 2014.

### The PRGT interest rate mechanism (framework and recent history)
- Framework elements:
  - Sets interest rates for each PRGT facility and links concessional lending rates to world interest rates as reflected in the SDR rate (Table 1).
  - Provides for a review of interest rates every two years.
  - In 2009, Executive Board endorsed a temporary waiver of interest payments on all Trust loans to end-2011; charges on GRA purchases under ENDA and EPCA were also subsidized to zero to end-January 2012.
- Outcome of the first scheduled review (concluded December 2011):
  - Interest rates for the two-year period to end-2013 were set at:
    - zero percent for loans under the Extended Credit Facility (ECF) and Rapid Credit Facility (RCF),
    - 0.25 percent for loans under the Standby Credit Facility (SCF).
- Interest rate mechanism table thresholds (Interest rate for concessional facility, In percent):
  - SDR rate < 20.000: ECF/RCF = 0.25, SCF = 0.25
  - 2 ≤ SDR rate ≤ 50.250: ECF/RCF = 0.25, SCF = 0.50
  - SDR rate > 50.500: ECF/RCF = 0.50, SCF = 0.75
  - Note: "The average SDR rate is based on the most recently observed 12-month period."
- Scope and exclusions:
  - PRGT mechanism does not apply to outstanding ESF loans committed up to April 7, 2010, or outstanding subsidized ENDA and EPCA purchases made as of January 7, 2010; those would carry an interest rate of 0.25 percent when exceptional relief terms expire.
- December 2011 Executive Director decisions:
  - Temporary extension of exceptional interest rate relief on concessional loans to end-2012.
  - Extension of subsidization of the rate of charge on outstanding ENDA and EPCA purchases made as of January 7, 2010 by PRGT-eligible members to zero percent until end-January 2013.
- Rationale at that time:
  - LICs had recovered reasonably quickly from the global crisis, but progress in rebuilding macroeconomic buffers had been slow, leaving LICs more vulnerable given increased risks to the global economic outlook.

### Coverage and fiscal magnitude of past relief
- As of October 31, 2012:
  - A total of 18 PRGT-eligible members and one member that graduated from PRGT eligibility in 2010 had received interest relief.
- Total amount of interest payments waived (combining actual relief and projected payments for the remainder of the waiver period):
  - SDR 8.7 million (Table 2), largely comprising:
    - ESF loans: SDR 7.8 million
    - ENDA/EPCA credits: SDR 0.8 million
- Cost of subsidizing to zero percent the rate of charge on outstanding ENDA/EPCA purchases from end-December 2012 to end-January 2013:
  - SDR 4.3 thousand

- Table 2: Country coverage and totals (In thousands of SDRs; combines actual amounts Jan 8, 2010 through October 31, 2012 and estimates for remainder of 2012):
  - SCF: 56.1
  - ESF: 7,795.6
  - ENDA/EPCA: 798.4
  - Total: 8,650.0
  - Country-level entries include (selected examples preserving values as presented):
    - Bangladesh: ESF 777.1; Total 777.1
    - Cameroon: SCF 691.9; Total 691.9
    - Congo, Dem. Rep. of: SCF 836.8; Total 836.8
    - Ethiopia: SCF 1,261.4; Total 1,261.4
    - Kenya: SCF 1,011.2; Total 1,011.2
    - Mozambique: SCF 829.9; Total 829.9
    - Tanzania: SCF 1,609.0; Total 1,609.0
    - (Full list and totals in Table 2 of the source.)

### Rationale for further extension (economic context and risks)
- LICs’ rebuilding of policy buffers since the 2008–09 crisis:
  - Initial success halted and partially reversed over 2011–12 with rising vulnerabilities.
  - Many LICs now have more limited fiscal space and larger current account deficits than prior to the crisis.
  - These conditions render LICs less prepared for a new crisis.
- Short-term global outlook:
  - Tilted to the downside.
  - A sharp slowdown in global growth or sharp increases in global food and fuel prices would significantly erode macroeconomic buffers and create large financing gaps.
  - A protracted global downturn would cause severe medium-term effects on LICs via accumulated permanent output losses, making additional external financing needs unsustainable and forcing policy adjustments that must balance fiscal consolidation with support for growth and priority spending.

### Cost implications and PRGT sustainability
- Estimated cost of a further extension of the exceptional interest relief for two years:
  - About SDR 3 million annually (measured in additional subsidy resources), based on:
    - existing commitments under ESF and SCF and ENDA/EPCA credits,
    - projected new commitments under the SCF,
    - prevailing interest rates implied by the existing rate structure.
- Consistency with PRGT financing framework:
  - The proposed extension’s modest additional cost is consistent with the three-pillar strategy to establish a self-sustaining PRGT, including a base envelope for lending capacity of SDR 1¼ billion per year.
  - However, allowing the interest rate mechanism to function as originally envisaged is important for the integrity of the PRGT financing framework.
  - Permanently setting zero interest rates on all PRGT facilities would reduce the self-sustained lending capacity of the PRGT by an estimated SDR 0.1 billion.
- Governance:
  - Staff will provide regular updates for Executive Directors to review the estimated self-sustained lending capacity of the PRGT in the semi-annual “Update on the Financing of the Fund’s Concessional Assistance and Debt Relief to Low-Income Member Countries”.

### Staff proposal and operational recommendations
- Staff proposes:
  - Extend the exceptional interest rate waiver on concessional loans by an additional two years to end-2014.
  - Further extend the subsidization to zero percent of the rate of charge on outstanding ENDA and EPCA purchases by PRGT-eligible members through April 4, 2013 (to coincide with the last remaining ENDA repurchases).
  - Postpone the next scheduled PRGT interest rate review to end-2014.
- Intended effect:
  - Signal continued Fund support for LICs while the global economic crisis remains ongoing.
  - Provide additional support to LICs with outstanding balances on SCF, ESF, and ENDA/EPCA credits, as well as to new SCF disbursements.

*Prepared by the Finance and the Strategy, Policy, and Review Departments (In consultation with the Legal Department); Approved by Andrew Tweedie and Siddharth Tiwari; December 14, 2012.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/np/pp/eng/2012/_121412b.pdf_