2016 Poverty Reduction and Growth Trust - Review of Interest Rate Structure

Policy Papers, August 24, 2016

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Canonical URL: 2016 Poverty Reduction and Growth Trust - Review of Interest Rate Structure

The paper reviews the interest rate structure that would apply to the PRGT in 2017–18.
It responds to the persistence of very low global interest rates and Executive Board practice of successive exceptional interest waivers on concessional credit.

Interest rate setting mechanism agreed in 2009.
Under that mechanism:
- Extended Credit Facility (ECF) rate would be zero.
- Standby Credit Facility (SCF) rate would be 0.25 percent.
- Rapid Credit Facility (RCF) rate was set permanently at zero in July 2015.

The Executive Board has granted successive exceptional interest waivers on all outstanding Fund concessional credit, setting all interest rates charged at zero percent.
These waivers have been extended three times, providing interest rate relief to many low-income countries facing global economic headwinds.

A strong case remains for maintaining zero rates on Fund concessional credit at the current global economic juncture.
The global outlook for LICs has not significantly improved since the last review and downside risks remain significant.
Many Directors noted at the last review in 2014 that a prolonged period of very low interest rates warrants an early re-examination of the mechanism, including an exit strategy from repeated application of the waiver, to safeguard the self-sustaining capacity of the PRGT.

Introduce a new threshold to accommodate anomalies created by prolonged very low interest rates:
- Both the ECF and the SCF rate would be set at zero when the 12-month average SDR rate is less than or equal to 0.75 percent.
Expected effects:
- This proposal will likely keep all PRGT interest rates under the mechanism at zero through at least 2020 given current market expectations.
- It would incur only minimal subsidy costs and eliminate the need for continual waivers.

Waive interest rate charges on outstanding legacy balances under the Exogenous Shocks Facility (ESF), which are not determined via the interest rate mechanism, until the next review.

Review period: 2017–18
Interest rate mechanism agreed: 2009
SCF rate under mechanism: 0.25 percent
RCF rate set permanently at zero: July 2015
Waivers extended: three times
Last review mentioned: 2014
Proposed 12-month average SDR rate threshold: less than or equal to 0.75 percent
Expected to keep PRGT rates at zero through: at least 2020
Publication date: August 24, 2016

2016 Poverty Reduction and Growth Trust - Review of Interest Rate Structure, August 24, 2016.

_100616a - Executive Summary
- _100616a - Executive Summary (Markdown version)
- _100616a - Executive Summary (PDF)