## POVERTY REDUCTION AND GROWTH TRUST—REVIEW OF INTEREST RATE STRUCTURE ## Source details **Canonical URL:** [POVERTY REDUCTION AND GROWTH TRUST—REVIEW OF INTEREST RATE STRUCTURE](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/np/pp/eng/2014/_111714.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/np/pp/eng/2014/_111714.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/np/pp/eng/2014/_111714.pdf.json) --- ### Executive summary - PRGT interest rates for 2015–16 (application of the PRGT interest rate mechanism): - Extended Credit Facility (ECF): zero percent - Rapid Credit Facility (RCF): zero percent - Stand-by Credit Facility (SCF): 0.25 percent - Exogenous Shock Facility (ESF) remaining balances: 0.25 percent (ESF rate is not set by the PRGT interest mechanism) - The next review of PRGT interest rates will take place by December 31, 2016. - The current two-year extension of the interest waiver on PRGT loans is due to expire at end-2014; staff recommends a further extension of the exceptional interest waiver through end-2016. - Continued exceptional interest relief would have a modest impact on payments by PRGT-eligible members with outstanding balances on SCF and ESF loans and those receiving new SCF disbursements. - Absorption of the total cost of a two-year extension would keep the PRGT’s financial position consistent with the self-sustained baseline capacity envisaged under the three-pillar strategy for PRGT financing. - A permanent waiver would undermine the average annual lending capacity of the self-sustained PRGT of SDR 1.25 billion; hence the waiver is recommended as temporary. ### PRGT lending interest rates (mechanism and 2015–16 implications) - Purpose and design of the 2009 mechanism: - Objectives: (i) make PRGT financing more concessional, (ii) preserve scarce concessional resources, (iii) tailor financing terms to members’ capacity, (iv) limit fluctuations in concessionality and subsidy costs. - Mechanism links PRGT facility rates to the SDR interest rate and differentiates rates across facilities: SCF rate is 0.25 percent higher than ECF/RCF. - ESF excluded from the review-based PRGT mechanism and set at 0.25 percent. - Operational rule for 2015–16: - PRGT rates set based on the average SDR rate for the prior 12 months. - With the 12-month average SDR rate well below the 2 percent threshold, the mechanism implies: - ECF and RCF interest rates of zero percent for 2015–16. - SCF interest rate of 0.25 percent for 2015–16. - ESF rate of 0.25 percent. - Contextual data preserved exactly as presented: - The SDR interest rate has been below 1 percent since December 2008, reaching almost zero in October 2014. - A 5 basis point floor on the SDR rate was introduced on October 24, 2014 together with a change in the rounding rules on the calculation of the SDR interest rate. - PRGT credit outstanding, as of end–September, 2014 (in millions of SDRs): ECF 4,721; RCF 271; SCF 9; ESF 1,056. - Since 2009, and as of end-September 2014, total new commitments amounted to: ECF SDR 4.0 billion; RCF SDR 0.3 billion; SCF SDR 0.4 billion. ### Exceptional waiver of interest payments (history, cost, and rationale) - History of the waiver: - Temporary interest relief on all outstanding concessional loans to PRGT-eligible members became effective January 7, 2010 and was intended to last until end-2011. - The waiver was extended to end-2012, and then to end-2014; subsidization of the rate of charge on outstanding ENDA/EPCA purchases was extended as appropriate in that period. - Quantified cost of the waiver (Jan. 2010–Dec. 2014): - Total interest payments waived (including projected amounts through end-2014): SDR 14.6 million. - Breakdowns of the SDR 14.6 million: - ESF: SDR 13.3 million - ENDA/EPCA: SDR 0.8 million - SCF: SDR 0.5 million - Beneficiaries and coverage: - Interest waiver provided savings to 18 PRGT-eligible members and one member that graduated from PRGT eligibility in 2010. - Arguments for further temporary extension: - Many LICs have been growing relatively strongly, but others remain highly vulnerable to downside risks to the global recovery. - Limited export diversification and weakened policy buffers leave some LICs less well-positioned to handle adverse shocks than prior to the global crisis. - A protracted period of slower growth in advanced and emerging market economies would have a significant adverse impact on the Fund’s poorest members. - Near-zero global interest rates create an unusual situation where some PRGT borrowers would be required to pay a rate exceeding the PRGT’s cost of funding on such credits, should the mechanism be applied. ### Staff assessment and recommendation (Section 1) - Staff recommends a further two-year extension of the exceptional interest waiver through end-2016. - Rationale: - Signals continued Fund support for low-income countries facing global headwinds. - Avoids an anomalous situation where SCF and ESF borrowers pay rates above PRGT borrowing costs given near-zero SDR rates. - The fiscal impact is modest (SDR 14.6 million to date for 2010–14) and a two-year extension’s cost can be absorbed while maintaining the PRGT’s self-sustained baseline capacity under the three-pillar financing strategy. - Conditional caveat: - The PRGT interest rate mechanism should be allowed to function as intended once conditions return to normal; a permanent waiver would undermine the PRGT’s average annual lending capacity of SDR 1.25 billion. ### Background and issue (Section 2) - The SDR rate is currently well below 0.25 percent, creating an unusual situation in which the PRGT’s cost of funding would be less than what PRGT borrowers would be charged on their outstanding SCF credits, which was not intended by the PRGT interest rate mechanism. - Borrowers with outstanding credits under the ESF would be similarly affected. - This could imply an increase in interest rates paid by a subset of PRGT borrowers at a time when global interest rates remain near zero. ### Cost estimates of extending the exceptional interest waiver - Reflecting the very low interest rate environment, the total cost of a further extension of the exceptional interest relief would be modest and remain consistent with the self-sustained capacity envisaged under the three-pillar strategy for PRGT financing. - Staff estimates the cost to the PRGT—in terms of additional subsidy cost and impact on the self-sustained lending capacity—of extending the waiver by another two years as follows: - The cost of such an extension, measured in terms of additional subsidy resources, would amount to about SDR 3 million annually in 2015–16. - Table 3—Interest Waiver—Annual Subsidy Cost to PRGT, 2015–16 (In millions of SDRs): - 2015: 2.9 - 2016: 3.4 - 2015–16: 6.3 - Given these modest amounts, staff estimates that the PRGT’s average annual lending capacity would remain consistent with Pillar I of the self-sustained strategy (which envisages an annual concessional lending capacity of SDR 1.25 billion, on average). ### Rationale for extending the waiver through end-2016 - On balance, staff sees a case for extending the exceptional interest waiver through end-2016. - An extension of the temporary relief would further delay the intended pricing differentiation between the instruments—specifically that between the SCF and the other PRGT facilities—but would: - Signal the Fund’s continued support for LICs at a time when these members continue to face economic headwinds from the global economic environment. - Provide some relief, albeit modest, on payments by LICs with outstanding balances on SCF and ESF loans, and those receiving new SCF disbursements. - Acknowledge recent developments in the SDR interest rate, which averaged 9 basis points in the last 12 months, and thus avoid a situation where the rate charged on SCF and ESF credits would exceed the Fund’s cost of borrowing for such loans. ### Risks and long-term impact - It remains important that the PRGT interest rate mechanism be allowed to function as originally envisaged to assure the integrity of the self-sustained framework for the PRGT. - The current global environment of low interest rates allows the cost of a temporary interest waiver to be absorbed while keeping the self-sustained capacity of the PRGT at an appropriate level. - However, prolonged extension of the waiver of interest payments on concessional lending would eventually undermine the self-sustained capacity of the PRGT, especially once global interest rates return to more normal levels. - Staff estimates that a permanent interest waiver on PRGT loans would reduce the PRGT’s average annual lending capacity by about SDR 0.12 billion, thereby pushing the PRGT’s self-sustained lending capacity well below the SDR 1.25 billion envisaged under Pillar I of the self-sustained strategy for the PRGT. - These estimates underscore the need to eventually restore the PRGT interest rate mechanism as intended by the Board, once global conditions normalize. ### Staff assessment and recommendation (Section 2) - Staff recommends the exceptional interest waiver for PRGT-eligible members be extended for a further two years until end-2016. - It is proposed that the exceptional interest waiver would expire at end-December 2016. - 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, 2016. *Prepared by the Finance and Strategy, Policy, and Review Departments (In consultation with the Legal Department), November 17, 2014. Source: Finance Department.* ### Section 1 ### POVERTY REDUCTION AND GROWTH TRUST—REVIEW OF INTEREST RATE STRUCTURE ### Executive summary - PRGT interest rates for 2015–16 (application of the PRGT interest rate mechanism): - Extended Credit Facility (ECF): zero percent - Rapid Credit Facility (RCF): zero percent - Stand-by Credit Facility (SCF): 0.25 percent - Exogenous Shock Facility (ESF) remaining balances: 0.25 percent (ESF rate is not set by the PRGT interest mechanism) - The next review of PRGT interest rates will take place by December 31, 2016. - The current two-year extension of the interest waiver on PRGT loans is due to expire at end-2014; staff recommends a further extension of the exceptional interest waiver through end-2016. - Continued exceptional interest relief would have a modest impact on payments by PRGT-eligible members with outstanding balances on SCF and ESF loans and those receiving new SCF disbursements. - Absorption of the total cost of a two-year extension would keep the PRGT’s financial position consistent with the self-sustained baseline capacity envisaged under the three-pillar strategy for PRGT financing. - A permanent waiver would undermine the average annual lending capacity of the self-sustained PRGT of SDR 1.25 billion; hence the waiver is recommended as temporary. ### PRGT lending interest rates (mechanism and 2015–16 implications) - Purpose and design of the 2009 mechanism: - Objectives: (i) make PRGT financing more concessional, (ii) preserve scarce concessional resources, (iii) tailor financing terms to members’ capacity, (iv) limit fluctuations in concessionality and subsidy costs. - Mechanism links PRGT facility rates to the SDR interest rate and differentiates rates across facilities: SCF rate is 0.25 percent higher than ECF/RCF. - ESF excluded from the review-based PRGT mechanism and set at 0.25 percent. - Operational rule for 2015–16: - PRGT rates set based on the average SDR rate for the prior 12 months. - With the 12-month average SDR rate well below the 2 percent threshold, the mechanism implies: - ECF and RCF interest rates of zero percent for 2015–16. - SCF interest rate of 0.25 percent for 2015–16. - ESF rate of 0.25 percent. - Contextual data preserved exactly as presented: - The SDR interest rate has been below 1 percent since December 2008, reaching almost zero in October 2014. - A 5 basis point floor on the SDR rate was introduced on October 24, 2014 together with a change in the rounding rules on the calculation of the SDR interest rate. - PRGT credit outstanding, as of end–September, 2014 (in millions of SDRs): ECF 4,721; RCF 271; SCF 9; ESF 1,056. - Since 2009, and as of end-September 2014, total new commitments amounted to: ECF SDR 4.0 billion; RCF SDR 0.3 billion; SCF SDR 0.4 billion. ### Exceptional waiver of interest payments (history, cost, and rationale) - History of the waiver: - Temporary interest relief on all outstanding concessional loans to PRGT-eligible members became effective January 7, 2010 and was intended to last until end-2011. - The waiver was extended to end-2012, and then to end-2014; subsidization of the rate of charge on outstanding ENDA/EPCA purchases was extended as appropriate in that period. - Quantified cost of the waiver (Jan. 2010–Dec. 2014): - Total interest payments waived (including projected amounts through end-2014): SDR 14.6 million. - Breakdowns of the SDR 14.6 million: - ESF: SDR 13.3 million - ENDA/EPCA: SDR 0.8 million - SCF: SDR 0.5 million - Beneficiaries and coverage: - Interest waiver provided savings to 18 PRGT-eligible members and one member that graduated from PRGT eligibility in 2010. - Arguments for further temporary extension: - Many LICs have been growing relatively strongly, but others remain highly vulnerable to downside risks to the global recovery. - Limited export diversification and weakened policy buffers leave some LICs less well-positioned to handle adverse shocks than prior to the global crisis. - A protracted period of slower growth in advanced and emerging market economies would have a significant adverse impact on the Fund’s poorest members. - Near-zero global interest rates create an unusual situation where some PRGT borrowers would be required to pay a rate exceeding the PRGT’s cost of funding on such credits, should the mechanism be applied. ### Staff assessment and recommendation - Staff recommends a further two-year extension of the exceptional interest waiver through end-2016. - Rationale: - Signals continued Fund support for low-income countries facing global headwinds. - Avoids an anomalous situation where SCF and ESF borrowers pay rates above PRGT borrowing costs given near-zero SDR rates. - The fiscal impact is modest (SDR 14.6 million to date for 2010–14) and a two-year extension’s cost can be absorbed while maintaining the PRGT’s self-sustained baseline capacity under the three-pillar financing strategy. - Conditional caveat: - The PRGT interest rate mechanism should be allowed to function as intended once conditions return to normal; a permanent waiver would undermine the PRGT’s average annual lending capacity of SDR 1.25 billion. *Prepared by the Finance and Strategy, Policy, and Review Departments (In consultation with the Legal Department), November 17, 2014.* ### Section 2 ### _111714 - Section 2 ### Background and issue - The SDR rate is currently well below 0.25 percent, creating an unusual situation in which the PRGT’s cost of funding would be less than what PRGT borrowers would be charged on their outstanding SCF credits, which was not intended by the PRGT interest rate mechanism. - Borrowers with outstanding credits under the ESF would be similarly affected. - This could imply an increase in interest rates paid by a subset of PRGT borrowers at a time when global interest rates remain near zero. ### Cost estimates of extending the exceptional interest waiver - Reflecting the very low interest rate environment, the total cost of a further extension of the exceptional interest relief would be modest and remain consistent with the self-sustained capacity envisaged under the three-pillar strategy for PRGT financing. - Staff estimates the cost to the PRGT—in terms of additional subsidy cost and impact on the self-sustained lending capacity—of extending the waiver by another two years as follows: - The cost of such an extension, measured in terms of additional subsidy resources, would amount to about SDR 3 million annually in 2015–16. - Table 3—Interest Waiver—Annual Subsidy Cost to PRGT, 2015–16 (In millions of SDRs): - 2015: 2.9 - 2016: 3.4 - 2015–16: 6.3 - Given these modest amounts, staff estimates that the PRGT’s average annual lending capacity would remain consistent with Pillar I of the self-sustained strategy (which envisages an annual concessional lending capacity of SDR 1.25 billion, on average). ### Rationale for extending the waiver through end-2016 - On balance, staff sees a case for extending the exceptional interest waiver through end-2016. - An extension of the temporary relief would further delay the intended pricing differentiation between the instruments—specifically that between the SCF and the other PRGT facilities—but would: - Signal the Fund’s continued support for LICs at a time when these members continue to face economic headwinds from the global economic environment. - Provide some relief, albeit modest, on payments by LICs with outstanding balances on SCF and ESF loans, and those receiving new SCF disbursements. - Acknowledge recent developments in the SDR interest rate, which averaged 9 basis points in the last 12 months, and thus avoid a situation where the rate charged on SCF and ESF credits would exceed the Fund’s cost of borrowing for such loans. ### Risks and long-term impact - It remains important that the PRGT interest rate mechanism be allowed to function as originally envisaged to assure the integrity of the self-sustained framework for the PRGT. - The current global environment of low interest rates allows the cost of a temporary interest waiver to be absorbed while keeping the self-sustained capacity of the PRGT at an appropriate level. - However, prolonged extension of the waiver of interest payments on concessional lending would eventually undermine the self-sustained capacity of the PRGT, especially once global interest rates return to more normal levels. - Staff estimates that a permanent interest waiver on PRGT loans would reduce the PRGT’s average annual lending capacity by about SDR 0.12 billion, thereby pushing the PRGT’s self-sustained lending capacity well below the SDR 1.25 billion envisaged under Pillar I of the self-sustained strategy for the PRGT. - These estimates underscore the need to eventually restore the PRGT interest rate mechanism as intended by the Board, once global conditions normalize. ### Staff assessment and recommendation - Staff recommends the exceptional interest waiver for PRGT-eligible members be extended for a further two years until end-2016. - It is proposed that the exceptional interest waiver would expire at end-December 2016. - 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, 2016. *Source: Finance Department.* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/np/pp/eng/2014/_111714.pdf_