The degree of concessionality of a loan is measured by its "grant element." The grant element is defined as the difference between the loan's nominal value (face value) and the sum of the discounted future debt-service payments to be made by the borrower (present value), expressed as a percentage of the loan's face value.
Whenever the interest rate charged for a loan is lower than the discount rate, the present value of the debt is smaller than its face value, with the difference reflecting the (positive) grant element of the loan. The discount rate used to calculate the loan's present value is a key assumption in the calculation of the grant element, and IMF uses a unified discount rate of 5 percent per annum.
Typically, a loan is considered to be concessional if its grant element is at least equal to 35 percent. Under this approach, the Fund may assess on a case-specific basis whether an envisaged combination of financing instruments can be treated as a package for purposes of meeting concessionality requirements.
As part of the 2020 DLP reforms, some non-standard types of financing are automatically treated as non-concessional, with a zero-grant element. These include blended financing arrangements that include the provision of a financially significant amount of grants in kind (e.g., grants provided in the form of equipment or machinery for a project) and financing involving unrelated collateral (e.g., general budget borrowing collateralized by earmarking of commodity receipts).
