## _031813a - EXECUTIVE SUMMARY

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### Review context and objective
- Executive Directors requested an expedited review following the 2012 Review of PRGT Eligibility; Board brought next review forward by one year.
- Staff conducted a comprehensive review of the Poverty Reduction and Growth Trust (PRGT)-eligibility framework and related list to assess balance among criteria: per capita income (GNI), market access, vulnerabilities, and size.
- Key objective: maintain a transparent, rules-based, and parsimonious framework consistent with the Trust’s objectives and the principle of self sustainability for the Trust’s finances.
- Review preserves differentiated criteria for entry and graduation to minimize untimely graduations and “reverse graduation.”
- Date of document excerpt: March 15, 2013.

### Findings on the current framework
- The 2010 criteria link PRGT eligibility to the Trust’s objectives: preserve concessional access for low-income countries facing economic and financial vulnerabilities, while limiting risks of debt distress.
- Framework structure:
  - Entry requires (i) annual per capita GNI below the IDA operational cutoff (US$1,195 in FY 2013) and (ii) lack of durable and substantial capacity to access international financial markets.
  - Graduation can be based on either an income criterion (sustained higher GNI per capita) or a market access criterion, and requires absence of serious short-term vulnerabilities.
  - Special criteria for “small states” (population below 1.5 million) with different thresholds for entry and graduation.
- The framework and list are expected to be reviewed every two years; the 2012 review raised the small-states population threshold from 1 to 1.5 million.

### Specific proposals and refinements
- No major design changes recommended; targeted refinements proposed:
  - Introduce special provisions for very small states (microstates) on grounds of special challenges; consider higher income thresholds for PRGT entry and for graduation for these states.
  - Maintain the “absence of serious short-term vulnerabilities” criterion in its current form to preserve flexibility and case-by-case evaluation in graduation decisions.
  - Refine the market access criterion, including differentiating entry and graduation thresholds, to strengthen safeguards against “reverse graduation.”

### Proposed microstate income thresholds and effects
- Proposed graduation threshold for income for microstates: at least six times the IDA threshold, or US$7,170 in this review.
- Proposed entry threshold for microstates: less than five times the IDA threshold, or US$5,975 in this review.
- With these thresholds:
  - Marshall Islands, Micronesia, and Tuvalu would meet the entry criteria for PRGT eligibility.
  - Dominica and St. Vincent and the Grenadines would no longer meet the income criterion for graduation.
  - With the new graduation threshold, only one currently eligible microstate (Grenada) would still have a per capita GNI above the graduation threshold—but it would not graduate as it is currently assessed at high risk of debt distress.

### Rationale for preserving the vulnerabilities criterion
- Maintain the “absence of serious short-term vulnerabilities” test to:
  - Provide flexibility and allow case-by-case assessment of risks such as sharp declines in income or loss of market access.
  - Ensure countries meeting income or market access thresholds do not graduate where serious risk circumstances could reverse (e.g., income falling below twice the IDA cutoff or loss of market access).
  - Use the latest Debt Sustainability Analysis (DSA) to assess debt vulnerabilities: for LIC-DSA, risk of external debt distress should be moderate or less; domestic debt should not raise serious concerns.
- Options rejected:
  - (i) introducing income ceilings beyond which members graduate irrespective of vulnerabilities—would reduce country-specific evaluation and create a new focal point hindering graduation; and
  - (ii) focusing solely on debt vulnerabilities—would reduce scope for judgment and safeguards (example: Vietnam would be proposed for graduation if only debt vulnerability were considered, despite signs of weakening prospects).
- Historical note: Six members (Armenia, Dominica, Georgia, Grenada, Maldives, and St. Vincent and the Grenadines) met income criteria in both 2010 and 2012 reviews but could not graduate owing to serious short-term vulnerabilities.
- Application outcome under current definition: Armenia and Georgia are ready to graduate in the 2013 round.

### Market access criterion—proposals for differentiation
- Staff proposes differentiating between entry and graduation thresholds for market access.
- Proposed market access thresholds:
  - Graduation level: could be set at double the entry level (as with income thresholds for non-small states).
  - Minimum actual market access required for graduation: 100 percent of quota cumulatively (measured over the last five years; access must be present during at least three of those five years), or convincing evidence that the sovereign could have tapped international markets as set forth in the decision.
  - Entry level: cumulative access of at least 50 percent of quota (with access required during at least two of the last five years) would be considered as having market access.
- Income threshold for market-access-based graduation:
  - Current: countries considered for graduation if annual per capita GNI is above 80 percent of the IDA operational cutoff.
  - Staff proposes increasing this threshold to 100 percent of the IDA operational cutoff to align with IDA practices.

### Data sources and assessment of market access
- Staff will continue to use the Global Development Finance (GDF), recently renamed International Debt Statistics (IDS), database; GDF/IDS data through end-2011 were published in December 2012 and are used for this review.
- To compensate for GDF/IDS lag, staff will assess potential market access using other providers (Bloomberg, Dealogic, and others).
- Potential market access assessment uses:
  - Volume and terms of recent actual borrowing; and
  - Sovereign credit rating.
- Investment grade has been used historically to support graduation proposals and remains valid evidence of potential market access; at present, there are no PRGT-eligible countries rated "investment grade".
- Assessment of potential market access must remain case-specific.

### Implications and operational considerations
- Application of the current eligibility framework in 2013 would reduce coverage of small states; some small states’ incomes exceed applicable entry thresholds (example: Tuvalu GNI per capita US$5,010).
- Strengthening differentiation between entry and graduation thresholds aims to reduce frequent reversals in eligibility and assist financial planning for the Trust and members.
- Operational provisions:
  - Graduations effective three months after Executive Board adoption, allowing Board to approve new PRGT support during transition.
  - Countries with concessional arrangements in force at effectiveness remain PRGT-eligible for full duration of arrangement; removal effective only upon termination of the arrangement.
  - Entry decisions effective immediately upon Executive Board adoption.
  - Repayments of outstanding PRGT credit remain subject to PRGT terms after graduation.

### Applications and recommended changes to the PRGT-eligibility list
- Proposed additions (entry) if microstate entry criteria approved:
  - Tuvalu, Marshall Islands, and Micronesia proposed for addition to the PRGT-eligibility list.
- Proposed graduations (income criterion):
  - Armenia and Georgia proposed for graduation on the basis of the income criterion; their short-term vulnerabilities appear manageable.
- Proposed non-graduation despite meeting some criteria (maintain eligibility due to vulnerabilities):
  - Grenada and Maldives meet the income criterion for graduation but staff proposes maintaining eligibility based on debt vulnerabilities.
  - Vietnam and Ghana meet the market access graduation criterion but staff proposes maintaining eligibility based on serious short-term vulnerabilities that could result in loss of market access.
- Pakistan meets the income criterion for entry but not the market access criterion and is therefore not proposed for entry (both criteria must be met).

### Country assessments and key numbers (selected highlights from Annex I and Annex II)
- Armenia:
  - 2011 GNI per capita: US$3,360 (more than 40 percent above graduation threshold US$2,390).
  - Growth accelerated to over 6 percent in 2012; 2012 LIC-DSA maintained low risk of debt distress.
  - Staff proposal: graduation.
- Georgia:
  - 2011 GNI per capita: US$2,860 (about 20 percent above graduation threshold US$2,390).
  - Public issuance/guarantees and disbursements over 2007–2011 cumulatively >700 percent of IMF quota; issued US$500 million Eurobond in 2008 and a second in 2011.
  - Real GDP growth projected at 7 percent in 2012; 2012 DSA: external and public debt projected to decline.
  - Staff proposal: graduation.
- Ghana:
  - 2011 GNI per capita: US$1,410.
  - Cumulative market access 354 percent of IMF quota over 2007–2011 (threshold 100 percent).
  - Serious short-term vulnerabilities in 2012: cash deficit estimated at 13.3 percent of non-oil GDP in 2012; official reserves less than three months of imports; NPLs at 13 percent of total loans in 2012.
  - 2012 LIC-DSA: moderate risk of debt distress.
  - Staff proposal: maintain PRGT eligibility.
- Grenada:
  - 2011 GNI per capita: US$7,220 (just over six times IDA operational cutoff US$7,170).
  - Public and publicly-guaranteed debt increased to 103 percent of GDP by end-2011; 2012 DSA: risk of debt distress remains high.
  - Staff proposal: maintain PRGT eligibility.
- Maldives:
  - 2011 GNI per capita: US$6,530 (more than five times IDA operational cutoff).
  - Public debt reaching 80 percent of GDP in 2012; fiscal deficit estimated around 13½ percent in 2012.
  - 2012 DSA: risk of external debt distress is high.
  - Staff proposal: maintain PRGT eligibility.
- Vietnam:
  - 2011 GNI per capita: US$1,260.
  - Cumulative market access >500 percent of IMF quota over 2007–2011 (threshold 100 percent); credit rating downgraded recently.
  - Public debt projected to increase to 53 percent of GDP by end-2012; banking sector vulnerabilities and contingent liabilities significant.
  - 2012 LIC-DSA: low risk of external debt distress but risks from contingent liabilities.
  - Staff proposal: maintain PRGT eligibility.
- Marshall Islands:
  - 2011 GNI per capita: US$3,910 (just over three times IDA operational cutoff).
  - Population around 50,000; external debt 64 percent of GDP by end-September 2011, mostly concessional.
  - Grants under Compact Agreement with United States declining and set to expire in FY2023.
  - Staff proposal: immediate entry.
- Micronesia:
  - 2011 GNI per capita: US$2,900 (about 2½ times IDA operational cutoff).
  - Population around 100,000; public debt gross in FY2011 at 28 percent of GDP.
  - Grants under Compact of Free Association with United States declining and set to expire in FY2023.
  - Staff proposal: immediate entry.
- Tuvalu:
  - 2011 GNI per capita: US$5,010 (just over four times IDA operational cutoff).
  - Population: 11,000.
  - 2011 public and publicly-guaranteed debt at 50 percent of GDP; 2011 LIC-DSA found high risk of debt distress.
  - Staff proposal: immediate entry.

### Financing implications and demand projections
- Staff projects the projected range of demand for Fund concessional resources broadly unchanged: between SDR 1.2 and 2.1 billion.
- Staff projections indicate over the next decade a further 15–20 countries could be ready to graduate from PRGT eligibility.
- Combined with proposals in the forthcoming LIC facilities review, overall average demand projections for 2013–35 would be in the range of SDR1.1–1.7 billion.
- Table 4 summary (average annual demand for access to PRGT resources, in billions of SDRs):
  - Baseline at time of gold windfall distribution decision:
    - 2013–23 low-case 1.1, high-case 1.8.
    - 2013–35 low-case 1.1, high-case 1.9.
  - Updated baseline without entry of new PRGT-eligible members:
    - 2013–23 low-case 1.1, high-case 1.7.
    - 2013–35 low-case 1.2, high-case 2.1.
  - With entry of new PRGT-eligible members:
    - 2013–23 low-case 1.1, high-case 1.7.
    - 2013–35 low-case 1.2, high-case 2.1.
  - Moderate expansion of blending rules:
    - 2013–23 low-case 1.0, high-case 1.5.
    - 2013–35 low-case 1.1, high-case 1.7.
  - More aggressive expansion of blending rules:
    - 2013–23 low-case 0.9, high-case 1.4.
    - 2013–35 low-case 1.0, high-case 1.6.
- Average annual savings (+) or dissavings (-) relative to updated baseline:
  - Updated baseline without entry: 0.0 for all reported cells, with a -0.2 in 2013–35 high-case.
  - With entry of new PRGT-eligible members: 0.0 and -0.2 similarly.
  - Moderate expansion of blending rules: 0.1, 0.3, 0.1, 0.2.
  - More aggressive expansion of blending rules: 0.1, 0.3, 0.1, 0.3.
- Table 4 assumptions:
  - Low-case: about 30 percent of PRGT-eligible countries resort to Fund financing in any given year.
  - High-case: some 50 percent of LICs request Fund financial support in any given year.
  - Updated baseline adjustments include: 50 percent reduction in access norms and limits (in percent of quota) when the quota increase under the Fourteenth General Review of Quotas goes into effect in 2013, followed by increases in access in nominal SDR terms of 24.2 percent at three-year intervals starting in 2016; applying the vulnerability criterion to graduation and blending assumptions; aligning graduation assumptions with the two-year PRGT-eligibility review cycle.
  - Entry of new PRGT-eligible members includes Marshall Islands, Micronesia, and Tuvalu.
  - Moderate expansion of blending rules: for PRGT-eligible countries presumed to blend, half of access to Fund resources is from the PRGT.
  - More aggressive expansion of blending rules: PRGT-eligible countries presumed to blend when their GNI per capita exceeds 80 percent of the prevailing IDA operational threshold and, for those countries, half of access to Fund resources is from the PRGT.

### Proposed high-level amendments and decisions
- Decision A (amend Decision No. 14521-(10/3)) — key elements:
  - Entry criteria: per capita GNI thresholds tied to IDA operational cut-off with multipliers for small countries and microstates; requirement that sovereign does not have capacity to access international financial markets on a durable and substantial basis as defined.
  - Income criterion (graduation): per capita GNI above IDA operational cut-off for at least the last five years, not declining, and latest data meeting multipliers:
    - at least twice the IDA operational cut-off for standard countries;
    - at least three times for small countries;
    - at least six times for microstates.
  - Replace reference to "80 percent" with "100 percent" in subparagraph (B)(2).
  - Market access threshold (subparagraph (C)(1)):
    - Entry: issuance/guarantee of external bonds or disbursements under external commercial loans during at least two of the last five years and cumulative amount equivalent to at least fifty percent of the member's quota (or 25 percent if Fourteenth General Review quota increase has become effective).
    - Graduation: similar requirements but during at least three of the last five years and cumulative amount equivalent to at least one hundred percent of the member's quota (or 50 percent if Fourteenth General Review quota increase has become effective).
  - Definitions: "small country" population below 1.5 million; "microstate" population below 200,000.
- Decision B (annex list amendments):
  - Add Federated States of Micronesia, Republic of the Marshall Islands, and Tuvalu.
  - Remove Georgia and Republic of Armenia.
  - Removal effective on July 8, 2013, or on termination date of any PRGT arrangement in existence for the country, whichever is later (for both Georgia and Republic of Armenia).

*Source: Executive Summary and excerpts from "Eligibility to Use the Fund’s Facilities for Concessional Financing," International Monetary Fund (March 15, 2013).*

### EXECUTIVE SUMMARY

### _031813a - EXECUTIVE SUMMARY

### Review context and objective
- Executive Directors expressed concerns during the 2012 Review of PRGT Eligibility; the Board decided to bring the next review forward by one year.
- Staff conducted a comprehensive review of the Poverty Reduction and Growth Trust (PRGT)-eligibility framework and related list to assess whether the balance among the criteria—per capita income (GNI), market access, vulnerabilities, and size—remains appropriate and whether additional or alternative indicators are warranted.
- A key objective is to maintain a transparent, rules-based, and parsimonious framework consistent with the Trust’s objectives and the principle of self sustainability for the Trust’s finances.
- The review preserves differentiated criteria for entry and graduation to minimize untimely graduations and “reverse graduation.”

*March 15, 2013*

### Findings on the current framework
- The 2010 criteria link PRGT eligibility to the Trust’s objectives: preserve concessional access for low-income countries facing related economic and financial vulnerabilities, while limiting risks of debt distress.
- The framework comprises differentiated criteria for entry and for graduation:
  - Entry requires (i) annual per capita GNI below the IDA operational cutoff (US$1,195 in FY 2013) and (ii) lack of durable and substantial capacity to access international financial markets.
  - Graduation can be based on either an income criterion (sustained higher GNI per capita) or a market access criterion, and requires absence of serious short-term vulnerabilities (see Box 1 summary in the source).
- The framework incorporates special criteria for “small states” (population below 1.5 million) with different thresholds for entry and graduation (see Box 2 summary in the source).
- The framework and list are expected to be reviewed every two years; the 2012 review raised the small-states population threshold from 1 to 1.5 million.

### Specific proposals and refinements
- No strong case for major design changes to the eligibility framework; targeted refinements are recommended:
  - Introduce special provisions for very small states (microstates) on grounds of their special challenges; consider higher income thresholds for PRGT entry and for graduation for these states.
  - Maintain the “absence of serious short-term vulnerabilities” criterion in its current form to preserve flexibility and case-by-case evaluation in graduation decisions.
  - Refine the market access criterion, including differentiating entry and graduation thresholds, to strengthen safeguards against “reverse graduation” (re-entry of recently graduated members).

### Applications and recommended changes to the PRGT-eligibility list
- Based on applying the revised framework, staff proposes:
  - Entry: Tuvalu, Marshall Islands, and Micronesia would be added to the PRGT-eligibility list if the proposed new entry criteria for microstates are approved.
  - Graduation (income criterion): Armenia and Georgia are proposed for graduation on the basis of the income criterion; their short-term vulnerabilities appear manageable.
  - Non-graduation despite meeting some criteria: Grenada and Maldives meet the income criterion for graduation, and Vietnam and Ghana meet the market access graduation criterion; staff proposes maintaining these countries’ PRGT eligibility at this time based on their serious short-term vulnerabilities.

### Rationale for preserving the vulnerabilities criterion and differentiated thresholds
- The “absence of serious short-term vulnerabilities” test is retained to:
  - Provide flexibility and allow case-by-case assessment of risks such as sharp declines in income or loss of market access.
  - Ensure that a country meeting income or market access thresholds does not graduate where there is a serious risk that circumstances could reverse (e.g., income falling below twice the IDA cutoff or loss of market access).
  - Use the latest Debt Sustainability Analysis (DSA) to assess debt vulnerabilities (for LIC-DSA, risk of external debt distress should be moderate or less; domestic debt should not raise serious concerns).

### Implications and operational considerations
- Application of the current eligibility framework in 2013 would reduce coverage of small states; some small states’ incomes exceed applicable entry thresholds (example: Tuvalu GNI per capita US$5,010).
- The review aims to strengthen differentiation between entry and graduation thresholds to reduce the risk of frequent reversals in eligibility status and assist financial planning for the Trust and members.
- The paper discusses operational implications of modifications, policies for phasing in eligibility-list changes, and potential impacts on demand for PRGT concessional resources (detailed tables and annexes provided in the source).

*Source: Executive Summary of the IMF paper “Eligibility to Use the Fund’s Facilities for Concessional Financing” (March 15, 2013).*

### 9.      In discussing the 2012 Review of PRGT Eligibility, Executive Directors called for further

### 9.      In discussing the 2012 Review of PRGT Eligibility, Executive Directors called for further

### Key analytical findings on small states (Box 3)
- Small states share intrinsic characteristics that can translate into special challenges for their development. One of these is that diseconomies of scale in providing public goods and services can limit institutional capacity.
- Small states are observed to have higher overall expenditure-to-GDP ratios and higher wage bills, which may reflect these diseconomies of scale in the public sector. A higher dependence on trade taxes may be due to higher trade openness, combined with a limited capacity to implement more broad-based tax systems.
- Unlike earlier studies on small states, emerging evidence suggests that relative growth performance of small states has deteriorated recently, particularly since the late 1990s. The most dramatic relative decline in growth performance was seen in micro states (states with a population of less than 200,000 people).
- Small states‘ social indicators (such as the Human Development Index) are broadly consistent with levels typically observed in larger countries with similar income levels.
- Small states‘ fiscal and external accounts have been more volatile and this may have contributed to a build-up of public debt.
- Financial sector development may have a particularly important role to play in helping to manage macroeconomic volatility as well as fostering growth.
- Small states use Upper-Credit Tranche (UCT) Fund facilities infrequently, but are frequent users of Fund emergency assistance in response to natural disasters.

### Staff conclusion on PRGT-eligibility indicator (paragraphs 11–13)
- GNI per capita remains the best indicator of relative poverty for the PRGT-eligibility framework—including for small states.
- Advantages of GNI per capita:
  - Data are prepared according to a transparent, well-established and well-documented procedure, available for a large group of countries, and published on a predictable annual timetable.
  - Its use is consistent with IDA practices since it continues to be the single most important determinant of IDA eligibility.
- On microstates (population below 200,000):
  - Microstates are prone to even greater volatility in fiscal and external accounts and face more pronounced diseconomies of small scale.
  - Staff proposes higher income-related thresholds for microstates than for other small states, both for PRGT entry and graduation:
    - Proposed graduation threshold for income for microstates: at least six times the IDA threshold, or US$7,170 in this review.
    - Proposed entry threshold for microstates: less than five times the IDA threshold, or US$5,975 in this review.
  - With these thresholds, Marshall Islands, Micronesia, and Tuvalu would meet the entry criteria for PRGT eligibility.
  - Dominica and St. Vincent and the Grenadines would no longer meet the income criterion for graduation under the proposed thresholds.
  - With the new graduation threshold, only one currently eligible microstate (Grenada) would still have a per capita GNI above the graduation threshold—but it would not graduate as it is currently assessed at high risk of debt distress.
  - The proposed higher income thresholds for microstates would align PRGT eligibility with IDA eligibility.

### The 'vulnerabilities' criterion (paragraphs 14–17)
- Under the current framework, members can only graduate from PRGT eligibility in the absence of serious short-term vulnerabilities. The definition is broad and has prevented the graduation of members that met the income criterion but not the "absence of vulnerabilities" criterion.
- Options considered to limit the scope of the "absence of vulnerabilities" criterion included:
  - (i) introducing income ceilings beyond which members graduate irrespective of their vulnerabilities, or
  - (ii) focusing on debt vulnerabilities only, since this would relate directly to members‘ ability to use GRA resources without jeopardizing debt sustainability.
- Staff view and recommendation:
  - It is critical to maintain flexibility and room for country-specific evaluation in determining readiness for graduation.
  - Maintain the ‘absence of serious short-term vulnerabilities’ criterion in its current form.
  - Rationale against the two options:
    - Introducing an income ceiling would (i) reduce or eliminate scope for country-specific evaluations and judgment; and (ii) likely become a new focal point, making it more difficult to graduate members that meet the income criterion but are below the new ceiling.
    - Focusing solely on debt vulnerabilities would reduce scope for judgment and safeguards against reverse graduation (example: Vietnam would be proposed for graduation if only debt vulnerability were considered, despite signs of weakening prospects).
- Historical context: Six members (Armenia, Dominica, Georgia, Grenada, Maldives, and St. Vincent and the Grenadines) met the income criteria in both the 2010 and the 2012 eligibility reviews but could not graduate owing to serious short-term vulnerabilities.
- Application outcome: Under the current definition of the “absence of vulnerabilities” criterion, Armenia and Georgia are ready to graduate in the 2013 round.

### Market access criterion—proposals for differentiation (paragraphs 18–19)
- Staff proposes differentiation between entry and graduation thresholds for market access to better align with the income criterion and add safeguards against reverse graduation.
- Proposed market access thresholds:
  - Graduation level: could be set at double the entry level (as with income thresholds for non-small states).
  - Minimum level of actual market access required for graduation: 100 percent of quota cumulatively (where "access" is measured over the last five years for which qualifying data are available, and access must be present during at least three of those five years), or convincing evidence must exist that the sovereign could have tapped the international markets as set forth in the decision on the PRGT-eligibility criteria.
  - Entry level: countries with access of at least 50 percent cumulatively (with access required during at least two of these five years) would be considered as having market access (paragraph 1(C)(1) of the revised PRGT-eligibility framework decision).
- Income threshold for market-access-based graduation:
  - Current framework: countries are considered for graduation under the market access criterion if their annual per capita GNI based on the latest qualifying annual data is above 80 percent of the IDA operational cutoff.
  - Staff proposes to increase this threshold to 100 percent of the IDA operational cutoff to further align PRGT eligibility with IDA practices (paragraph 1(B)(2) of the revised PRGT-eligibility framework decision).

*Source: Excerpt from "Eligibility to Use the Fund‘s Facilities for Concessional Financing," International Monetary Fund, 2013.*

### 20.      Staff will continue to use the Global Development Finance (GDF), recently renamed

### _031813a - 20.      Staff will continue to use the Global Development Finance (GDF), recently renamed

### Data sources and methodology
- Staff will continue to use the Global Development Finance (GDF), recently renamed International Debt Statistics (IDS), database to assess actual market access to ensure continuity with previous PRGT-eligibility reviews.
- GDF/IDS data through end-2011 were published in December 2012 and are used for this review of PRGT eligibility.
- To compensate for the lag in GDF/IDS data availability, staff will continue to assess potential market access using relevant data available through other data providers (for example Bloomberg, Dealogic, and others, as available).

### Assessment of potential market access
- Potential market access can be assessed using:
  - the volume and terms of recent actual borrowing; and
  - the sovereign credit rating.
- An investment grade credit rating has been used historically to support a proposal for graduation and can continue to be used as evidence of potential market access.
- At present, there are no PRGT-eligible countries that are rated "investment grade".
- Market-access assessment considerations:
  - Introducing differentiation between entry and graduation thresholds by using a lower credit rating at entry would be difficult to implement because market access below investment grade depends on global market sentiment.
  - Countries with ratings higher than single B (but below investment grade) tend to have market access, but not consistently.
  - The assessment of potential market access must remain case-specific.

### Sovereign ratings (Table 3)
- Table 3 lists latest sovereign ratings (Fitch, Standard & Poor's, Moody's) for PRGT-eligible countries; sources: Rating agencies' websites.
- Note on investment grade definitions in Table 3:
  - Fitch: BBB- or higher (BB+ and below)
  - S&P: BBB- or higher (BB+ and below)
  - Moody's: Baa3 or higher (Ba1 and below)
- Ratings data were downloaded December 17, 2012.

### Implications for the PRGT-eligibility list (staff proposals)
- Proposed additions to PRGT-eligible members:
  - Tuvalu, Marshall Islands, and Micronesia: proposed addition because their per capita GNI meets the entry threshold for microstates (i.e., is less than five times the IDA operational cutoff) and they do not have capacity to access international financial markets on a durable and substantial basis (as defined under the newly proposed market access threshold for entry).
- Proposed graduations from PRGT-eligibility:
  - Armenia and Georgia: proposed to graduate based on the income criterion (their per capita GNI exceeds twice the IDA operational cutoff and the two other elements of the income criterion are also met), in the absence of serious short-term vulnerabilities. Georgia also meets the market access criterion.
- Countries proposed to remain PRGT-eligible:
  - Grenada and Maldives: staff proposes maintaining PRGT eligibility based on their debt vulnerabilities; eligibility will be reassessed at the next PRGT-eligibility review (both currently meet the income criterion for graduation, while Maldives also meets the market access criterion).
  - Ghana and Vietnam: although meeting the market access criterion, staff proposes maintaining PRGT eligibility based on serious short-term vulnerabilities that could result in a loss of market access.
- Pakistan: meets the income criterion for entry but not the market access criterion, and is therefore not proposed for entry (both criteria must be met).

### Policies for phasing in changes in eligibility
- Graduations would become effective three months after the adoption of the related decision by the Executive Board, consistent with the current PRGT-eligibility framework decision, allowing the Board to approve new requests for PRGT support during the transitional period.
- Countries that meet graduation criteria but have concessional arrangements in place when the new decision becomes effective would remain PRGT-eligible for the full duration of the arrangement; removal would become effective only upon termination of the relevant arrangement.
- Decisions regarding entry to the PRGT-eligibility list become effective immediately upon adoption by the Executive Board.
- Repayments of outstanding PRGT credit remain subject to PRGT terms after graduation, including repayments linked to ongoing or past arrangements or outright disbursements and disbursements approved during the transitional period.

### Financing implications and demand projections
- Staff’s proposals would be expected to leave the projected range of demand for the Fund’s concessional resources broadly unchanged: between SDR 1.2 and 2.1 billion.
- Staff projections indicate that over the next decade, a further 15–20 countries could be ready to graduate from PRGT eligibility.
- When combined with proposals in the forthcoming LIC facilities review, overall average demand projections for 2013–35 would be in the range of SDR1.1–1.7 billion.
- Table 4: Average annual demand for access to PRGT resources (in billions of SDRs)
  - Baseline at time of gold windfall distribution decision: 2013–23 low-case 1.1, high-case 1.8; 2013–35 low-case 1.1, high-case 1.9.
  - Updated baseline without entry of new PRGT-eligible members: 2013–23 low-case 1.1, high-case 1.7; 2013–35 low-case 1.2, high-case 2.1.
  - With entry of new PRGT-eligible members: 2013–23 low-case 1.1, high-case 1.7; 2013–35 low-case 1.2, high-case 2.1.
  - Moderate expansion of blending rules: 2013–23 low-case 1.0, high-case 1.5; 2013–35 low-case 1.1, high-case 1.7.
  - More aggressive expansion of blending rules: 2013–23 low-case 0.9, high-case 1.4; 2013–35 low-case 1.0, high-case 1.6.
- Average annual savings (+) or dissavings (-) relative to updated baseline:
  - Updated baseline without entry: 0.0 for all reported cells, with a -0.2 in 2013–35 high-case.
  - With entry of new PRGT-eligible members: 0.0 and -0.2 similarly.
  - Moderate expansion of blending rules: 0.1, 0.3, 0.1, 0.2.
  - More aggressive expansion of blending rules: 0.1, 0.3, 0.1, 0.3.
- Assumptions and notes in Table 4:
  - Low-case scenario: about 30 percent of PRGT-eligible countries would resort to Fund financing in any given year.
  - High-case scenario: some 50 percent of LICs request some form of Fund financial support in any given year.
  - Updated baseline adjustments include: 50 percent reduction in access norms and limits (in percent of quota) when the quota increase under the Fourteenth General Review of Quotas goes into effect in 2013, followed by increases in access in nominal SDR terms of 24.2 percent at three-year intervals, starting in 2016; applying the vulnerability criterion to graduation and blending assumptions; aligning graduation assumptions with the two-year PRGT-eligibility review cycle.
  - Entry of new PRGT-eligible members includes Marshall Islands, Micronesia, and Tuvalu.
  - Moderate expansion of blending rules assumes that, for PRGT-eligible countries presumed to blend, half of access to Fund resources is from the PRGT.
  - More aggressive expansion of blending rules assumes PRGT-eligible countries are presumed to blend when their GNI per capita exceeds 80 percent of the prevailing IDA operational threshold and that, for those countries, half of access to Fund resources is from the PRGT.

### Proposed amendments and decisions (high level)
- Decision A: Amendments to Decision No. 14521-(10/3) to revise PRGT entry and graduation criteria, including:
  - Entry criteria: per capita GNI thresholds tied to IDA operational cut-off with specific multipliers for small countries and microstates; requirement that the sovereign does not have capacity to access international financial markets on a durable and substantial basis as defined.
  - Income criterion (graduation): requires per capita GNI above IDA operational cut-off for at least the last five years, not on a declining trend, and latest data meeting multipliers (at least twice the IDA operational cut-off; at least three times for small countries; at least six times for microstates).
  - Replace reference to "80 percent" with "100 percent" in subparagraph (B)(2).
  - Market access threshold (subparagraph (C)(1)): issuance/guarantee of external bonds or disbursements under external commercial loans occurring during at least two of the last five years and cumulative amount equivalent to at least fifty percent of the member's quota (or 25 percent if Fourteenth General Review quota increase has become effective); for paragraph (B)(2) the threshold is during at least three of the last five years and cumulative amount equivalent to at least one hundred percent of the member's quota (or 50 percent if Fourteenth General Review quota increase has become effective).
  - Definitions: "small country" population below 1.5 million; "microstate" population below 200,000.
- Decision B:
  - Amend the annexed list by adding Federated States of Micronesia, Republic of the Marshall Islands, and Tuvalu; and removing Georgia and Republic of Armenia.
  - Removal of Georgia from the list becomes effective on July 8, 2013, or on the date of termination of any PRGT arrangement in existence for Georgia, whichever is later.
  - Removal of Republic of Armenia from the list becomes effective on July 8, 2013, or on the date of termination of any PRGT arrangement in existence for the Republic of Armenia, whichever is later.

*International Monetary Fund — ELIGIBILITY TO USE THE FUND'S FACILITIES FOR CONCESSIONAL FINANCING (excerpts from document)_031813a*

### Annex I. Assessments of Countries that Meet the Income or

### Annex I. Assessments of Countries that Meet the Income or 

### Armenia
- 2011 GNI per capita: US$3,360 (more than 40 percent above graduation threshold US$2,390).
- Income above IDA operational cutoff since 2004 and not on a declining trend for at least the last five years.
- Market access: has not established durable and sustainable market access.
- 2012 performance:
  - Growth accelerated to over 6 percent, led by agriculture, agro-processing, mining, and services.
  - Construction stabilizing; credit expanding at a healthy pace.
  - Financial sector remains well capitalized.
  - No significant spillovers from the euro area crisis.
- 2008–09 crisis impact: substantial fall in GDP, sharply higher debt ratios, elevated poverty incidence.
- Fiscal policy:
  - Authorities implementing a fiscal adjustment path to stabilize debt, supported under the 2010–13 EFF/ECF arrangement.
  - Consolidation larger than expected in 2012 due to spending restraint and revenue gains.
- External position: external consolidation continued; reserves are adequate.
- Vulnerabilities: high dependence on remittances and a weak export base; 2012 LIC-DSA maintained low risk of debt distress.
- Staff view: vulnerabilities being reduced; per capita income so far above threshold that downside scenario unlikely to drop below it—no serious short-term vulnerabilities as defined under the framework.
- Staff proposal: graduation of Armenia.

### Georgia
- 2011 GNI per capita: US$2,860 (about 20 percent above graduation threshold US$2,390).
- Income above IDA operational cutoff over the last eight years and not declining over the last five years.
- Market access:
  - Public sector issuance/guarantees and disbursements under public and publicly-guaranteed external commercial loans cumulatively amounted to more than 700 percent of IMF quota over 2007–2011, with access in four of these years.
  - Issued a US$500 million Eurobond in 2008 and a second one in 2011; sovereign credit rating stable for more than a year.
- Macroeconomic conditions:
  - Real GDP growth projected at 7 percent in 2012 (same as 2011).
  - Inflation expected to moderate to zero in 2012 from 8.5 percent in 2011.
  - Banking sector sound: sufficient capital and liquidity; NPLs remain low.
- Fiscal policy: countercyclical response followed by consolidation under 2012–14 SBA/SCF.
  - Deficit projected to narrow to 3.6 percent of GDP in 2012 and 2.8 percent in 2013.
  - Public debt projected to fall to 32 percent of GDP in 2013.
- External position:
  - Current account deficit high at 12½ percent of GDP in both 2011 and 2012; bulk financed by FDI and official inflows (FDI weakened recently; part financed by nonresident deposits).
  - 2012 DSA: external debt around 80 percent of GDP including intercompany loans; both external and public debt projected to decline and converge toward moderate levels under standard shocks.
- Staff view: vulnerabilities contained; fiscal consolidation on track; per capita income so far above threshold making downside return unlikely—no serious short-term vulnerabilities.
- Staff proposal: graduation of Georgia.

### Ghana
- Market access criterion met: cumulative market access 354 percent of IMF quota over 2007–2011 (threshold 100 percent).
- 2011 GNI per capita: US$1,410 (meets minimum income level for market access criterion).
- Income on increasing trend over past five years.
- Growth and inflation:
  - GDP growth 14 percent in 2011 (start of oil production); estimated 7 percent in 2012.
  - Inflation about 9 percent year on year; non-food CPI inflation 11.5 percent in January 2013.
  - February fuel price increase of 20 percent not yet reflected in inflation data.
- Short-term vulnerabilities (serious and increased in pre-election environment):
  - Significant fiscal policy slippages: high public wage payments and energy subsidies.
  - Cash deficit estimated at 13.3 percent of non-oil GDP in 2012 (up from 6.7 percent anticipated at completion of 2009–12 ECF-supported program).
  - Cedi depreciated by about 20 percent in first half of 2012 amid loose monetary policy and election-related spending; slide halted by significant monetary tightening resulting in high double-digit real interest rates.
  - Current account deficit estimated at 13 percent of GDP.
  - Official reserves less than three months of imports.
  - Financial sector underdeveloped; NPLs at 13 percent of total loans in 2012.
- Debt dynamics:
  - 2012 LIC-DSA: moderate risk of debt distress.
  - External debt around 22 percent of GDP at end-2012.
  - Large 2012 deficit primarily financed by domestic debt; net domestic financing exceeded an estimated 10 percent of non-oil GDP in 2012.
  - Domestic debt about 28 percent of GDP at end-2012.
- Staff view: market access not sufficiently assured given serious short-term vulnerabilities that may put at risk ability to maintain market access.
- Staff proposal: maintain Ghana’s PRGT eligibility; reassess at next PRGT-eligibility review.

### Grenada
- 2011 GNI per capita: US$7,220 (just over six times the IDA operational cutoff US$7,170).
- Income not on a declining trend over last five years.
- Crisis impact and recovery:
  - Severely impacted by global financial crisis; contraction in 2009–10; fragile recovery underway.
  - Real GDP growth projected at 1.5 percent in 2012 following 1 percent expansion in 2011; recovery driven by agriculture and tourism.
  - Inflation projected at about 3 percent in 2012, as in 2011.
- Fiscal and debt:
  - Fiscal balance deteriorated significantly in 2011 due to expansionary fiscal policies and temporary tax breaks.
  - Public and publicly-guaranteed debt increased to 103 percent of GDP by end-2011.
  - Since mid-2011, no review completed under three-year ECF arrangement approved April 2010.
- Vulnerabilities:
  - 2012 DSA: risk of debt distress remains high.
  - Current account deficit high at 25 percent of GDP in 2011.
  - Financial sector vulnerable: rising NPLs and declining profitability.
  - Region-wide issues (insolvency of BAICO and CLICO) could add pressure.
- Staff view: short-term vulnerabilities remain significant, especially given very high public debt.
- Staff proposal: maintain Grenada’s PRGT eligibility; reassess at next PRGT-eligibility review.

### Maldives
- 2011 GNI per capita: US$6,530 (more than five times IDA operational cutoff).
- Income on increasing trend over past five years.
- Market access:
  - Public sector issuance/guarantees and disbursements cumulatively amounted to more than 900 percent of IMF quota over 2007–2011, with access in at least three of these years—met both income and market access criteria.
- Vulnerabilities: criterion not met due to chronic fiscal and external imbalances.
- Fund program history: SBA and ESF approved December 2009 went off track owing to fiscal slippages.
- Fiscal and debt:
  - Fiscal deficit estimated around 13½ percent in 2012.
  - Public debt reaching 80 percent of GDP in 2012.
- Growth and external:
  - Growth about 7 percent in 2010 and 2011; projected 3½ percent in 2012.
  - Current account deficit projected to widen from 20 percent of GDP in 2011 to 29 percent in 2012.
  - 20 percent devaluation in April 2011 led to inflation surge to 17 percent by end-2011; inflation projected at 8 percent by end-2012.
- Financial sector: banking system broadly sound but supervision weak, especially at main state bank; many commercial banks non-compliant with prudential regulations.
- Debt sustainability:
  - Most recent DSA: risk of external debt distress is high.
  - Public external debt path projected to worsen through 2030 under baseline; debt path not sustainable without additional fiscal consolidation.
- Staff view: short-term vulnerabilities clearly significant; high income and market access insufficient to qualify for graduation.
- Staff proposal: maintain Maldives’ PRGT eligibility; reassess at next PRGT-eligibility review.

### Vietnam
- Market access:
  - Public and publicly-guaranteed external bonds and commercial loan inflows cumulatively more than 500 percent of IMF quota over 2007–2011 (threshold 100 percent).
  - Credit agencies recently downgraded the country’s credit rating for the first time since 2010.
- 2011 GNI per capita: US$1,260 (above minimum income threshold for market access criterion).
- Income on increasing trend over past five years.
- Macroeconomic conditions:
  - Real GDP growth projected to decline to 5 percent in both 2012 and 2013.
  - Inflation volatile; projected at single digit levels by end-2012 after peaking above 20 percent in mid-2011.
  - International reserves around two months of imports by end-2012 (up from 1.4 months at end-2010 and end-2011).
- Fiscal and debt:
  - Fiscal deficit projected to widen from 3 percent of GDP in 2011 to 5½ percent in 2012.
  - Public debt projected to increase to 53 percent of GDP by end-2012.
- Structural vulnerabilities:
  - Urgently needed banking and state-owned enterprise reforms largely unaddressed.
  - Banking system characterized by poor asset quality, under-provisioning, low profitability, and foreign exchange risks.
  - Weaknesses in banking sector undermine stability and constrain growth.
- DSA: 2012 LIC-DSA confirmed low risk of external debt distress but called for continued fiscal consolidation; risks from contingent liabilities from financial sector and state-owned enterprises.
- Staff view: market access not sufficient to qualify for graduation given serious short-term vulnerabilities and signs of weakening prospects for future access.
- Staff proposal: maintain Vietnam’s PRGT eligibility; reassess at next PRGT-eligibility review.

*Source: Annex I and Annex II assessments in the provided IMF content unit.*

### Marshall Islands
- Current status: not PRGT-eligible; has IDA-only status under small island economy exception.
- 2011 GNI per capita: US$3,910 (just over three times IDA operational cutoff).
- Population: around 50,000 people.
- Market access: does not have market access.
- Economic features and risks:
  - Highly dependent on foreign aid, mainly from the United States.
  - Grants under the Compact Agreement with the United States steadily declining and set to expire in FY2023.
  - Buildup in Compact Trust Fund assets slow.
  - Recovery after 2009 recession was short lived; near-term growth prospects weak.
  - Highly vulnerable to commodity price shocks; food and fuel products constitute almost half of CPI basket.
  - Continued outward migration and climate change pose long-term risks.
- External debt: amounted to 64 percent of GDP by end-September 2011, mostly concessional and projected to decline.
- DSA: formal DSA not conducted in recent years.
- Staff proposal: immediate entry of Marshall Islands.

### Micronesia
- Current status: not PRGT-eligible; has IDA-only status under small island economy exception.
- 2011 GNI per capita: US$2,900 (about 2½ times IDA operational cutoff).
- Population: around 100,000 people.
- Market access: does not have market access.
- Economic features and risks:
  - Highly dependent on foreign aid, mainly from the United States.
  - Weak growth prospects due to lack of diversification and sluggish private sector.
  - Imports around 55 percent of GDP; vulnerable to commodity price fluctuations.
  - Grants under Compact of Free Association with the United States declining and set to expire in FY2023, threatening long-term fiscal sustainability.
- Public debt: all external, much owed to ADB on concessional terms; gross public debt in FY2011 at 28 percent of GDP.
- DSA: formal DSA not conducted in recent years.
- Staff proposal: immediate entry of Micronesia.

### Tuvalu
- Membership: joined IMF and World Bank in June 2010.
- 2011 GNI per capita: US$5,010 (just over four times IDA operational cutoff).
- Population: 11,000 people (smallest member of Bretton Woods institutions).
- IDA-only status: granted November 2011 under small island economies exception.
- Market access: does not have market access.
- Economic features and risks:
  - Minimal potential for economic diversification; nearly all goods imported including petroleum and food.
  - Extremely vulnerable to international price fluctuations and climate change (highest elevation only 15 feet above sea level).
  - Real GDP growth slow since global financial crisis; grew 1.1 percent in 2011 after two years of decline.
  - Near-term real GDP growth projected around 1 percent.
- Debt sustainability:
  - Recent and first LIC-DSA found a high risk of debt distress.
  - External debt and debt service ratios breached many indicative thresholds under baseline.
  - Public and publicly-guaranteed debt at 50 percent of GDP in 2011; projected to remain above 40 percent of GDP in near term.
  - DSA concluded greater access to grants essential to meet development needs.
- Staff proposal: immediate entry of Tuvalu.

*Source: Annex I and Annex II assessments in the provided IMF content unit.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/np/pp/eng/2013/_031813a.pdf_