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IDA Financial Management

International Development Association April 1998

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IDA FINANCIAL MANAGEMENT

IDA12 Discussion Paper

Introduction

1 The purpose of this paper is to describe the structure and the management of IDAs financial resources

2 IDAs commitment authority has two components donor resources l made available through replenishments and RIT02 resources The latter consist of reflows investment income net income transfers from IBRD and any additional resources (such as residual RITO resources from past replenishments)

3 Section I of the paper focuses on donor resources and describes the risks resulting from the currency mismatch between donor contributions and credit commitments In addition it describes the encashment of donor contributions and shows the flexibility IDA could exercise to smooth the pace of encashments over the medium-term to allow donors to ensure stability in planning for IDAs cash needs

4 Section II of the paper focuses on the management of RITO resources It explains how IDA assesses the availability of RITO resources over the course of the next replenishment and determines the level of commitments it could make against such resources In addition this section describes the risks associated with the Advance Commitment Scheme in case reflows do not materialize as expected and the impact of changing the terms of IDA lending Finally this section projects IDAs capacity to commit against RITO resources during IDAl2

5 Section ill of the paper explains how IDA manages the currency composition of its liquid assets in order to mitigate the risk resulting from the currency mismatch it faces In addition this section sets out how IDA manages its liquid assets

6 Section IV of the paper examines the feasibility of offering currency choice to IDA borrowers It reviews IDAs past experience in offering USD-denominated credits and concludes that while desirable in cases where IDA borrowers could avail themselves of a sovereign debt management framework within which to exercise choice offering currency choice to IDA borrowers would most likely increase rather than decrease IDAs currency risk exposure

2

Donor resources consist of new donor contributions received under a replenishment agreement and the donor carryover from the previous replenishment

RITO stands for Beflows nvestment income mRD net income Iransfers and Other resources

I Donor Resources

7 Donor resources now constitute the bulk of IDAs resources and entail the bulk of IDAs currency risk exposure Donor resources are denominated for the most pan in national currencies while IDA credits are denominated in SDR There is a time lag between the commitment of credits and the full availability of donor funds to finance such credits This gives rise to exchange rate risks for IDA and its borrowers

8 Under each replenishment agreement donors pledge contributions in SDR or in their respective national currencies-equivalent to cenain amounts in SDR based on reference exchange rates agreed upon by IDA Deputies These donor resources together with IDAs agreed level of commitments against RITO resources constitute IDAs expected lending envelope for the replenishment period During the three years of the replenishment period most donors provide IDA with promissory notes The encashment of donor contributions is stretched over a period which can be either fixed in advance as in IDAlO or agreed indicatively at the time of the replenishment agreement-based on the expected disbursement schedule of IDA credits-and funher refined during the implementation period of the agreement

Risks Associated with Donor Resources

9 During the period between the conclusion of a replenishment agreement among donors and the completion of the encashment of donor contributions the SDR value of the replenishment resources is subject to exchange rate fluctuations This risk can be disaggregated into two distinct components

bull Risk of Commitment ShortfalL During the three-year replenishment period there is a risk that the actual SDR value of the donor contributions denominated in national currencies might either exceed or fall shon of the SDR value of the pledged contributions as defined by the reference exchange rates agreed upon by the Deputies IDA continuously monitors the current SDR value of donor contributions to ensure that IDAs commitments remain within its commitment authority IDAs commitment authority is thus adjusted continuously to take into account the flow of new donor contributions and to reflect the depreciation-or the appreciation-in SDR terms of donor contributions to date The risk of a shortfall in commitment authority is borne by IDA borrowers in the sense that the overall lending program of IDA would have to be adjusted accordingly3

3 For example the current SDR value ofITF amp IDAll donor contributions as of February 281998

amounts to SDR 6632 million while the SDR value of the same contributions at the reference exchange rates agreed upon in the IDAll replenishment agreement amounts to SDR 6843 million The result is therefore a shortfall in commitment authority of SDR 211 million

4

- 3-

bull Risk of Inadequate Resources for Disbursements After completion of the threeshyyear replenishment period there is a further risk that donor resources (primarily in the form of promissory notes denominated in national currencies4

) might not be sufficient to meet the disbursement needs corresponding to IDAs SDRshydenominated credit commitments IDA is therefore exposed to the risk that the SDR value-upon encashment-of the donor contributions may fall short of the SDR value of the commitments made during the replenishment period This is the source of IDAs currency risk exposure as evidenced on Chart 1 below where encashments after year 3 (area II) represent 80 of total encashments

35 -

Chart I Donor Commitments Compared with Estimated Consolidated Encashment Profile for the lIT and IDAII

----------------~ 30

25 --

-=20 -lt u

E15 -

10

31

Donor commitments ie note deposits ( 00 over 3 years)

Encashments to meet disbursement obligations

0~~--~----------4-----------------______ ~ ________ ~ o 3 Year 6

1 Eruashmcnts (after year 3) disbursements are made in SDR but encashments are made in national cummcics 21 Donor resources encasbed in nalioDal CUJTCDCics and disbursed in SDR through year 3 31 Donor resounes expressed in SDR but paid in national currcncics

9

By the end of the IDAll replenishment period encashments will represent 935 of the donor contributions on a regular encashment schedule and 1169 of contributions on an accderated encashment schedule About 90 of donor contributions will still be in the form of promissory notes at the end of the IDAII replenishment period

-4-

Steps Taken to Reduce Risks

10 IDA has taken a number of measures to ~educe its currency risk exposures

These measures include

bull In IDA6 IDA began to denominate credits in SDR rather than USD Since the SDR is a basket of currencies this reduces IDAs currency risk relative to that which would be associated with making commitments in any single currency

bull During the IDA6 negotiations donors as a group agreed that it would be preferable to denominate donor contributions in SDR IDA urged donors to pledge in SDR and a few agreed to do SO6 However most donors have continued to denominate their contributions in their national currency

bull In IDA9 and IDA10 donors whose annual rate of inflation was higher than 15 (during a specified time period) agreed to denominate their contributions in SDR This provision was also part of the IDA 1 1 replenishment agreement with the threshold inflation rate reduced to 10 In IDAll this provision applied to eight donors-representing 071 of donor contributions

The bulk of donor contributions is therefore still denominated in a basket of currencies that is different from the SDR Therefore the relative value of donor resources vis-a-vis IDAs disbursement obligations fluctuates as a function of exchange rate movements

11 IDA recognizes that the risk resulting from the currency mismatch between donor contributions and credit commitments can be mitigated to a greater extent when both donor resources and RITO resources are managed together In particular IDA manages the currency composition of its liquid assets-mainly composed of RITO resources-in order to reduce its currency risk exposure This is discussed in Section ill of the paper

s

6

The earliest replenishment agreements included a maintenance of value (MOV) obligation for donors under which they were required to maintain the value of their respective contributions in USD the currency in which IDA credits were denominated This requirement ceased in IDA4

In IDAlO Austria Germany the Netherlands and donor countries with an annual rate of inflation higher than 15 denominated their contributions in SDR In IDAll the Netherlands and donor countries with an annual rate of inflation higher than 10 denominated their contributions in SDR In IDA12 the Netherlands expeCts to contribute in NLG or in euro

~ 5 ~

Encashment of Donor Resources

12 IDA draws down donor contributions on an approximately pro rata basis among donors in order to meet operational commitments and to maintain a reasonable working cash balance During the replenishment discussions donors are provided with an estimated schedule for the encashment of their contributions This estimated schedule is based on the expected composition of the lending program the pace of disbursements and the practice of maintaining a cushion of donor liquidity equivalent to about 6 weeks of disbursements

13 In IDAlO most donors agreed to participate in a fixed encashment scheme that encashes donor resources at a faster pace than disbursement needs in order to provide IDA with additional resources by way of generating additional investment income Under the provisions of the ITF and IDA 1 1 replenishment agreements a number of donors decided to continue encashing their contributions on a fixed and accelerated basis For the ITF they include Botswana Brazil Denmark France Hungary Ireland Japan Korea Netherlands Norway Poland and Sweden For IDA 1 1 they include Botswana Brazil Denmark Hungary Ireland Korea Norway Poland and Sweden

14 For budgetary planning purposes donors usually request IDA to provide updated encashment schedules to them on an annual basis Encashment projections are updated based on the current pace of disbursements as well as the encashment status of individual donors For existing replenishments (up to and including IDA11) total encashments are expected to stay roughly at the current level of about $5 billion through FYOO The pace of encashments thereafter will depend primarily on the size of IDA12 and subsequent replenishments Table 1 shows one scenario for lending levels and future donor commitments-the declining trend of the latter reflecting the expectation of a transition to self-sustainability over the next 10 to 15 years

1

Table 1 Self-Sustainability Scenario for IDA12-IDA18

Replenishment IDA12 IDA 13 IDA 14 IDA15 IDA16 IDA17

Lending Program (SDR billion)

160 158 147 140 141 144

Donor Contributions (SD R billion)

94 92 81 72 27 09

A brief outline of the expected transition to self-sustainability can be found in Annex 1

-6-

15 These estimates of future donor contributions together with donor commitments through IDAll suggest an encashment profile with fluctuations which may create budgetary planning difficulties for some donors Although projected encashment profiles vary for each donor the projected aggregate profile in Chart 2 is representative of individual encashment profiles which to a large extent reflect the impact of the fixed and accelerated encashment schedule adopted by donors in IDAI0

Chart 2 IDA Projected Encashments

IDA Projected Encashments

4500 -

~ 3500 1

2500 ~

E

iIIIfIIII = 2S C - 2 ~

~ i2 sect gt- gt- gt- c ~ -

16 In the past it has been IDAs practice to accomodate requests by individual donors for changes in the pace of their encashment-provided that the requested proftle differs from that being applied to other donors by less than 10 per year that any shortfall is made up the following year and that the present value of the encashment profile is not significantly affected

17 With the provisos mentioned in the previous paragraph IDA is financially indifferent between the range of possible encashrnent paths which are consistent with the expected evolution of RITO resources Since the projected rise-and-dip profile may be of concern to many donors we would welcome views on what flexibility IDA should exercise and on whether donors would like to consider approaches which would permit them to face smoother encashment profJles over time-while maintaining the present value of donor transfers to IDA at the intended level

-7-

II RITe Resources

Table 2 IDA Funding Framework SDR billion

IDA9 IDA10 ITF amp IDA11 Actual Actual Planned

FY91-93 FY94-96 FY97-99

A Lending fl 1421 1318 1326

B Donor contributions pledged 1122 1236 668

C Actual donor contributions during period 1112 1114 800

D from current replenishment pledge cI 1112 1104 668

E from previous replenishments al bI 010 132

F RITO resources 378 376 636

G IBRD dl 067 070 086

H Advance commitments eI 188 190 353

L Carry-over of previous RITO resources fl OSO 070 172 J Fifth dimension 044 046 025

K Tota donor contributions and RITO (C + F) 1490 1490 1436

L Total carryover from previous resources (E + J) 080 080 304

Note Details may not acid up becaIse of lCIUIlding

81 IDA 10 Repruents IOAS cantributions from the US paid during the lOA 10 period and lie corresponding proma release

from Germany III lOA 11 Represenlll IDA 10 canIibuIionS from the US paid during the lOA 11 period the ~ proma IIIIIIase from

rJ IOA11 figunIs vakIed a 12131197 exchange rates

dI The FY99 amount 01 USO 300 million I1IfIIIcts the undeIstanding readied for IDA 11

III Include surpluses from the cIoIIing of the Special Fund and the FY84 AIxIcu1I of USO 600 million (I0A10 period)

IOA7 of USO 100 million (10A11 period) and IDAB of USO 480 million (IOA12 period)

fI The 10M ~ inCludes SOR 190 million ~from 10AI SOR 130 million es part of the Gull Assistance Program

and SOR 4n milliOn from IQ-IOAS India CIIICIIIIIatio 10A91ending iraIcIes SOR 4n million in recommiIrnent$lO India

Sources of RITO Resources

18 RITO resources consist of reflows investment income net income transfers from mRD and any additional resources such as service charges paid to IDA net of administrative expenses and residual resources from past replenishments) As can be seen in Table 2 RITO resources have been playing an increasing role in the funding of IDA RITO resources which funded 25 of IDA9 and IDA10 are expected to fund 48 of IDA 11 and the ITF

- 8 -

19 mRD Net Income Transfers Allocations of mRD net income are governed by a medium-term frameworks under which the first priority is assuring the adequacy of mRD reserves In the face of a declining trend in mRD net income and growing pressures to increase reserves due to a higher portfolio risk the amount of net income available for other uses-including transfers to IDA-is expected to decline sharply in FY98 The future levels of mRD net income and the amounts required for allocation to reserves are not certain Thus the amounts available for other uses cannot be determined in advance The mRDs Articles of Agreement require that the disposition of net income be authorized by its Board of Governors after such income has been earned and an amount has been allocated for reserves adequacy Therefore mRD cannot pledge transfers from future net income As a result expected contributions from IBRD during a replenishment and possible future contributions should be treated differently from donor pledges

Uses of RITO Resources

20 In addition to serving as the primary buffer against unexpected financial shocks RITO resources enable IDA to finance both new IDA credits through advance commitments and the Fifth Dimension Program

21 Under the Advance Commitment Scheme IDA commits RITO resources that are expected to become available in the coming years in advance of their actual receipt Because IDA credits disburse over several years there is a time lag between credit approval and cash requirements It is therefore possible to rely on IDA expected inflows to meet future disbursement obligations Reflows (which represent the largest component of IDAs expected inflows) and future investment income increase IDAs commitment authority through the Advance Commitment Scheme

22 The other use of RITO resources is the Fifth Dimension Program which was established to assist IDA countries that are no longer able to borrow on IBRD terms (ie IDA-only countries) but have outstanding mRD debt The facility allocates on an annual basis additional resources to IDA-only countries that meet specific requirements in proportion to a countrys interest payments on its mRD debt Only loans approved by the Executive Directors prior to the creation of the program (on September 23 1988) are covered Since Fifth Dimension credits are provided as a lump-sum supplement to adjustment credits they are fast-disbursing and they need to be financed by RITO resources that are available in cash or expected to become so within the coming year

8 Medium-Term Oudook and Policy on Annual Allocation of Net Income R90-193 dated September 211990 as revised in SecM90-14791 dated November 271990 and in R97-1751 datedJuly 181997 and R97-1752 dated July 301997

~9-

Table 3 Uses ofRITO Resource (USD million excel SDR million as noted)

AsW1 tmialtd lD6ll mall 112613 lIol~

~ fr22 ill m2 fYoo EYQ FY02 fY03 FY04 ll2l FY06 FY07 FYOS

IUTO Position I (1IltIillaing r bull 11 hlr 3687 4410 4650 4210 3699 3789 3295 3332 2331 1338 1432 82S

Addi_ Dotrio FY 2 Repaymentgt ai 615 679 828 971 1171 1376 1572 1759 1963 2163 2332 2558

]nvatmcnt income 275 251 241 217 205 197 185 165 120 98 87 64

4 mIlD Net Income Transfer bl 600 300 bl bI hi hi 300 900

5 NO offect of punbue of IDA cndi1S by HIPC cJ 134 25 28 207 228 middot29 middot32 middot36 -42 -45 -48

6 ou inOows d 297 232 0 0 486 0 602 0 0 0 0 0

1 TouIlal1ow 1181 1596 1094 1216 2069 1801 2630 1892 2047 3119 2374 2574

tI Dotrill FY 8 lgtisbwsenenlS on prior IJenihm IIId

contribution to administrative expenses e 0 131 0 0 0 0 0 0 0 0 0 0

9 Disbursements on advance commitments and commitmerus Ipinst net income DIIlSfm 910 1112 1450 1608 1938 2261 2513 2879 lO32 l025 2918 2964

10 DisbursemcnlS on Fifth DimenslOft CRdils 154 113 54 59 41 28 20 14 8 0 0 0

II TouIOcn- 1064 1356 1534 1727 1979 2295 2593 2893 3040 3025 2918 2964

~ 123 240 -440 middot511 90 -494 37 middot1001 99l 94 6Q4 middot390

RITOP 12 (Ead orfiocal Year) 4410 4650 4210 3699 3789 3295 3332 2331 1338 1432 828 438

Mcmoicems _ b)l1UTO RaouICD

3 Advance CommiD1 (SDR) 783 944 2423f1 1950 1950 1950 2200 2200 2200 2200 2200 2200 14 IuIvance Commi1m u (USD) 1096 1274 3211 2633 2633 2633 2970 2910 2970 2970 2970 2970 IS Fifth Dim i1m Crediu (SDR) 110 54 62 44 30 21 IS 10 6 0 0 0 16 Fifth Di ion Credits (USD) 154 III 54 59 41 28 20 14 8 0 0 0

Noe SDRIUSD excIwIgc tale - 13 5 Note DOIalla may _ add up due rounding

aI no IlOl iIgtdude npaymoms from CXlUIlIrics in w IIIIIIIS 1gt1 The fY91 and FY9S II1II_ IOIISIII rnnsf of 5300 million per year from mIlD lid m- IIId 5300 million from ourpl

RdlectiJIg theundenandins_ed for IDAll1II mllDrnnsferofS3OO million has been for fY99(to benrzived in rY03) Projections IigtltfY00-02 n working assumplicm ofllle COIIWruaUonofmllD income IrII1Jf ofSloo million per year The mIlD can only provide WA the _ that this is armpatible with its own Ii--=ial and prudcnIial i_ and subjoct the I4PfOVII of the Board of Governors lBRDs i_ is dedininS and fuIUrc -e to WA may not be feasible Fuurno lid income pngtSpetlI are under intenJe _ and will be discussed in dclail by 1bc EDs ia tile MIl fuIUrc Rcoeipt ofthesc rnnsf is in fY06

clllepnscats projected net off on IDA r cial flows fnlat HIPC ~ spccif ly the offcct of IDA fiulding HIPC during the wun period and tile porrdIae of IDA cndits by the HIPC Trust FWIlt Thae -Id be ~ IS vcy prdimiDary ati-ince the IICtIIaI HIPC will depaId on Board daiIion ooraming fuIUrc eligibility of coumria Iigtlt HIPC dot relief the _ or deb relief to be poovided Oft IDA debt IIId the ftlCCbaniam for 1bc debt relief in _h

d The fY97 amoun_1S adjus on RITO The fY9S amoun projected SlltJI in IDA 7 FYOI projected surplus in IDAS and fY01 projected ourpluo in IDA9

d Projected disbunemcnts in IDA 7 in fY98 Proie=- _ income fnlat ce ciwBeo equals admiaisnlive Service ciwBeo fnlat CXlUIlIrics in --=noaI eluded

fllnltludes RITO __ ofSDRI7 billionCllried fnlat IDAIO cxcIuda aporcud CIIITY ofRITO ofSDRII billion

Management of RITa Resources

23 The Executive Directors review and approve a three-year framework for RITa resources for the replenishment period9 They also review and approve on an annual basis the use of RITa resources through the Advance Commitment Scheme and the Fifth Dimension Program10 Projected IBRD interest payments eligible for coverage under the Fifth Dimension Program are fast declining and will become negligible (less than USD 10 million) by FY05 By far the largest part of RITa resources is used through the Advance Commitment Scheme

9

10

IDAll Non-Donor Resource Framework FY97-99 IDAlR96-143 dated July 18 1996

Use of IDAs RITO Resources - FY98 IDAlR97-84 dated July 29 1997

I Donor Resources

7 Donor resources now constitute the bulk of IDAs resources and entail the bulk of IDAs currency risk exposure Donor resources are denominated for the most pan in national currencies while IDA credits are denominated in SDR There is a time lag between the commitment of credits and the full availability of donor funds to finance such credits This gives rise to exchange rate risks for IDA and its borrowers

8 Under each replenishment agreement donors pledge contributions in SDR or in their respective national currencies-equivalent to cenain amounts in SDR based on reference exchange rates agreed upon by IDA Deputies These donor resources together with IDAs agreed level of commitments against RITO resources constitute IDAs expected lending envelope for the replenishment period During the three years of the replenishment period most donors provide IDA with promissory notes The encashment of donor contributions is stretched over a period which can be either fixed in advance as in IDAlO or agreed indicatively at the time of the replenishment agreement-based on the expected disbursement schedule of IDA credits-and funher refined during the implementation period of the agreement

Risks Associated with Donor Resources

9 During the period between the conclusion of a replenishment agreement among donors and the completion of the encashment of donor contributions the SDR value of the replenishment resources is subject to exchange rate fluctuations This risk can be disaggregated into two distinct components

bull Risk of Commitment ShortfalL During the three-year replenishment period there is a risk that the actual SDR value of the donor contributions denominated in national currencies might either exceed or fall shon of the SDR value of the pledged contributions as defined by the reference exchange rates agreed upon by the Deputies IDA continuously monitors the current SDR value of donor contributions to ensure that IDAs commitments remain within its commitment authority IDAs commitment authority is thus adjusted continuously to take into account the flow of new donor contributions and to reflect the depreciation-or the appreciation-in SDR terms of donor contributions to date The risk of a shortfall in commitment authority is borne by IDA borrowers in the sense that the overall lending program of IDA would have to be adjusted accordingly3

3 For example the current SDR value ofITF amp IDAll donor contributions as of February 281998

amounts to SDR 6632 million while the SDR value of the same contributions at the reference exchange rates agreed upon in the IDAll replenishment agreement amounts to SDR 6843 million The result is therefore a shortfall in commitment authority of SDR 211 million

4

- 3-

bull Risk of Inadequate Resources for Disbursements After completion of the threeshyyear replenishment period there is a further risk that donor resources (primarily in the form of promissory notes denominated in national currencies4

) might not be sufficient to meet the disbursement needs corresponding to IDAs SDRshydenominated credit commitments IDA is therefore exposed to the risk that the SDR value-upon encashment-of the donor contributions may fall short of the SDR value of the commitments made during the replenishment period This is the source of IDAs currency risk exposure as evidenced on Chart 1 below where encashments after year 3 (area II) represent 80 of total encashments

35 -

Chart I Donor Commitments Compared with Estimated Consolidated Encashment Profile for the lIT and IDAII

----------------~ 30

25 --

-=20 -lt u

E15 -

10

31

Donor commitments ie note deposits ( 00 over 3 years)

Encashments to meet disbursement obligations

0~~--~----------4-----------------______ ~ ________ ~ o 3 Year 6

1 Eruashmcnts (after year 3) disbursements are made in SDR but encashments are made in national cummcics 21 Donor resources encasbed in nalioDal CUJTCDCics and disbursed in SDR through year 3 31 Donor resounes expressed in SDR but paid in national currcncics

9

By the end of the IDAll replenishment period encashments will represent 935 of the donor contributions on a regular encashment schedule and 1169 of contributions on an accderated encashment schedule About 90 of donor contributions will still be in the form of promissory notes at the end of the IDAII replenishment period

-4-

Steps Taken to Reduce Risks

10 IDA has taken a number of measures to ~educe its currency risk exposures

These measures include

bull In IDA6 IDA began to denominate credits in SDR rather than USD Since the SDR is a basket of currencies this reduces IDAs currency risk relative to that which would be associated with making commitments in any single currency

bull During the IDA6 negotiations donors as a group agreed that it would be preferable to denominate donor contributions in SDR IDA urged donors to pledge in SDR and a few agreed to do SO6 However most donors have continued to denominate their contributions in their national currency

bull In IDA9 and IDA10 donors whose annual rate of inflation was higher than 15 (during a specified time period) agreed to denominate their contributions in SDR This provision was also part of the IDA 1 1 replenishment agreement with the threshold inflation rate reduced to 10 In IDAll this provision applied to eight donors-representing 071 of donor contributions

The bulk of donor contributions is therefore still denominated in a basket of currencies that is different from the SDR Therefore the relative value of donor resources vis-a-vis IDAs disbursement obligations fluctuates as a function of exchange rate movements

11 IDA recognizes that the risk resulting from the currency mismatch between donor contributions and credit commitments can be mitigated to a greater extent when both donor resources and RITO resources are managed together In particular IDA manages the currency composition of its liquid assets-mainly composed of RITO resources-in order to reduce its currency risk exposure This is discussed in Section ill of the paper

s

6

The earliest replenishment agreements included a maintenance of value (MOV) obligation for donors under which they were required to maintain the value of their respective contributions in USD the currency in which IDA credits were denominated This requirement ceased in IDA4

In IDAlO Austria Germany the Netherlands and donor countries with an annual rate of inflation higher than 15 denominated their contributions in SDR In IDAll the Netherlands and donor countries with an annual rate of inflation higher than 10 denominated their contributions in SDR In IDA12 the Netherlands expeCts to contribute in NLG or in euro

~ 5 ~

Encashment of Donor Resources

12 IDA draws down donor contributions on an approximately pro rata basis among donors in order to meet operational commitments and to maintain a reasonable working cash balance During the replenishment discussions donors are provided with an estimated schedule for the encashment of their contributions This estimated schedule is based on the expected composition of the lending program the pace of disbursements and the practice of maintaining a cushion of donor liquidity equivalent to about 6 weeks of disbursements

13 In IDAlO most donors agreed to participate in a fixed encashment scheme that encashes donor resources at a faster pace than disbursement needs in order to provide IDA with additional resources by way of generating additional investment income Under the provisions of the ITF and IDA 1 1 replenishment agreements a number of donors decided to continue encashing their contributions on a fixed and accelerated basis For the ITF they include Botswana Brazil Denmark France Hungary Ireland Japan Korea Netherlands Norway Poland and Sweden For IDA 1 1 they include Botswana Brazil Denmark Hungary Ireland Korea Norway Poland and Sweden

14 For budgetary planning purposes donors usually request IDA to provide updated encashment schedules to them on an annual basis Encashment projections are updated based on the current pace of disbursements as well as the encashment status of individual donors For existing replenishments (up to and including IDA11) total encashments are expected to stay roughly at the current level of about $5 billion through FYOO The pace of encashments thereafter will depend primarily on the size of IDA12 and subsequent replenishments Table 1 shows one scenario for lending levels and future donor commitments-the declining trend of the latter reflecting the expectation of a transition to self-sustainability over the next 10 to 15 years

1

Table 1 Self-Sustainability Scenario for IDA12-IDA18

Replenishment IDA12 IDA 13 IDA 14 IDA15 IDA16 IDA17

Lending Program (SDR billion)

160 158 147 140 141 144

Donor Contributions (SD R billion)

94 92 81 72 27 09

A brief outline of the expected transition to self-sustainability can be found in Annex 1

-6-

15 These estimates of future donor contributions together with donor commitments through IDAll suggest an encashment profile with fluctuations which may create budgetary planning difficulties for some donors Although projected encashment profiles vary for each donor the projected aggregate profile in Chart 2 is representative of individual encashment profiles which to a large extent reflect the impact of the fixed and accelerated encashment schedule adopted by donors in IDAI0

Chart 2 IDA Projected Encashments

IDA Projected Encashments

4500 -

~ 3500 1

2500 ~

E

iIIIfIIII = 2S C - 2 ~

~ i2 sect gt- gt- gt- c ~ -

16 In the past it has been IDAs practice to accomodate requests by individual donors for changes in the pace of their encashment-provided that the requested proftle differs from that being applied to other donors by less than 10 per year that any shortfall is made up the following year and that the present value of the encashment profile is not significantly affected

17 With the provisos mentioned in the previous paragraph IDA is financially indifferent between the range of possible encashrnent paths which are consistent with the expected evolution of RITO resources Since the projected rise-and-dip profile may be of concern to many donors we would welcome views on what flexibility IDA should exercise and on whether donors would like to consider approaches which would permit them to face smoother encashment profJles over time-while maintaining the present value of donor transfers to IDA at the intended level

-7-

II RITe Resources

Table 2 IDA Funding Framework SDR billion

IDA9 IDA10 ITF amp IDA11 Actual Actual Planned

FY91-93 FY94-96 FY97-99

A Lending fl 1421 1318 1326

B Donor contributions pledged 1122 1236 668

C Actual donor contributions during period 1112 1114 800

D from current replenishment pledge cI 1112 1104 668

E from previous replenishments al bI 010 132

F RITO resources 378 376 636

G IBRD dl 067 070 086

H Advance commitments eI 188 190 353

L Carry-over of previous RITO resources fl OSO 070 172 J Fifth dimension 044 046 025

K Tota donor contributions and RITO (C + F) 1490 1490 1436

L Total carryover from previous resources (E + J) 080 080 304

Note Details may not acid up becaIse of lCIUIlding

81 IDA 10 Repruents IOAS cantributions from the US paid during the lOA 10 period and lie corresponding proma release

from Germany III lOA 11 Represenlll IDA 10 canIibuIionS from the US paid during the lOA 11 period the ~ proma IIIIIIase from

rJ IOA11 figunIs vakIed a 12131197 exchange rates

dI The FY99 amount 01 USO 300 million I1IfIIIcts the undeIstanding readied for IDA 11

III Include surpluses from the cIoIIing of the Special Fund and the FY84 AIxIcu1I of USO 600 million (I0A10 period)

IOA7 of USO 100 million (10A11 period) and IDAB of USO 480 million (IOA12 period)

fI The 10M ~ inCludes SOR 190 million ~from 10AI SOR 130 million es part of the Gull Assistance Program

and SOR 4n milliOn from IQ-IOAS India CIIICIIIIIatio 10A91ending iraIcIes SOR 4n million in recommiIrnent$lO India

Sources of RITO Resources

18 RITO resources consist of reflows investment income net income transfers from mRD and any additional resources such as service charges paid to IDA net of administrative expenses and residual resources from past replenishments) As can be seen in Table 2 RITO resources have been playing an increasing role in the funding of IDA RITO resources which funded 25 of IDA9 and IDA10 are expected to fund 48 of IDA 11 and the ITF

- 8 -

19 mRD Net Income Transfers Allocations of mRD net income are governed by a medium-term frameworks under which the first priority is assuring the adequacy of mRD reserves In the face of a declining trend in mRD net income and growing pressures to increase reserves due to a higher portfolio risk the amount of net income available for other uses-including transfers to IDA-is expected to decline sharply in FY98 The future levels of mRD net income and the amounts required for allocation to reserves are not certain Thus the amounts available for other uses cannot be determined in advance The mRDs Articles of Agreement require that the disposition of net income be authorized by its Board of Governors after such income has been earned and an amount has been allocated for reserves adequacy Therefore mRD cannot pledge transfers from future net income As a result expected contributions from IBRD during a replenishment and possible future contributions should be treated differently from donor pledges

Uses of RITO Resources

20 In addition to serving as the primary buffer against unexpected financial shocks RITO resources enable IDA to finance both new IDA credits through advance commitments and the Fifth Dimension Program

21 Under the Advance Commitment Scheme IDA commits RITO resources that are expected to become available in the coming years in advance of their actual receipt Because IDA credits disburse over several years there is a time lag between credit approval and cash requirements It is therefore possible to rely on IDA expected inflows to meet future disbursement obligations Reflows (which represent the largest component of IDAs expected inflows) and future investment income increase IDAs commitment authority through the Advance Commitment Scheme

22 The other use of RITO resources is the Fifth Dimension Program which was established to assist IDA countries that are no longer able to borrow on IBRD terms (ie IDA-only countries) but have outstanding mRD debt The facility allocates on an annual basis additional resources to IDA-only countries that meet specific requirements in proportion to a countrys interest payments on its mRD debt Only loans approved by the Executive Directors prior to the creation of the program (on September 23 1988) are covered Since Fifth Dimension credits are provided as a lump-sum supplement to adjustment credits they are fast-disbursing and they need to be financed by RITO resources that are available in cash or expected to become so within the coming year

8 Medium-Term Oudook and Policy on Annual Allocation of Net Income R90-193 dated September 211990 as revised in SecM90-14791 dated November 271990 and in R97-1751 datedJuly 181997 and R97-1752 dated July 301997

~9-

Table 3 Uses ofRITO Resource (USD million excel SDR million as noted)

AsW1 tmialtd lD6ll mall 112613 lIol~

~ fr22 ill m2 fYoo EYQ FY02 fY03 FY04 ll2l FY06 FY07 FYOS

IUTO Position I (1IltIillaing r bull 11 hlr 3687 4410 4650 4210 3699 3789 3295 3332 2331 1338 1432 82S

Addi_ Dotrio FY 2 Repaymentgt ai 615 679 828 971 1171 1376 1572 1759 1963 2163 2332 2558

]nvatmcnt income 275 251 241 217 205 197 185 165 120 98 87 64

4 mIlD Net Income Transfer bl 600 300 bl bI hi hi 300 900

5 NO offect of punbue of IDA cndi1S by HIPC cJ 134 25 28 207 228 middot29 middot32 middot36 -42 -45 -48

6 ou inOows d 297 232 0 0 486 0 602 0 0 0 0 0

1 TouIlal1ow 1181 1596 1094 1216 2069 1801 2630 1892 2047 3119 2374 2574

tI Dotrill FY 8 lgtisbwsenenlS on prior IJenihm IIId

contribution to administrative expenses e 0 131 0 0 0 0 0 0 0 0 0 0

9 Disbursements on advance commitments and commitmerus Ipinst net income DIIlSfm 910 1112 1450 1608 1938 2261 2513 2879 lO32 l025 2918 2964

10 DisbursemcnlS on Fifth DimenslOft CRdils 154 113 54 59 41 28 20 14 8 0 0 0

II TouIOcn- 1064 1356 1534 1727 1979 2295 2593 2893 3040 3025 2918 2964

~ 123 240 -440 middot511 90 -494 37 middot1001 99l 94 6Q4 middot390

RITOP 12 (Ead orfiocal Year) 4410 4650 4210 3699 3789 3295 3332 2331 1338 1432 828 438

Mcmoicems _ b)l1UTO RaouICD

3 Advance CommiD1 (SDR) 783 944 2423f1 1950 1950 1950 2200 2200 2200 2200 2200 2200 14 IuIvance Commi1m u (USD) 1096 1274 3211 2633 2633 2633 2970 2910 2970 2970 2970 2970 IS Fifth Dim i1m Crediu (SDR) 110 54 62 44 30 21 IS 10 6 0 0 0 16 Fifth Di ion Credits (USD) 154 III 54 59 41 28 20 14 8 0 0 0

Noe SDRIUSD excIwIgc tale - 13 5 Note DOIalla may _ add up due rounding

aI no IlOl iIgtdude npaymoms from CXlUIlIrics in w IIIIIIIS 1gt1 The fY91 and FY9S II1II_ IOIISIII rnnsf of 5300 million per year from mIlD lid m- IIId 5300 million from ourpl

RdlectiJIg theundenandins_ed for IDAll1II mllDrnnsferofS3OO million has been for fY99(to benrzived in rY03) Projections IigtltfY00-02 n working assumplicm ofllle COIIWruaUonofmllD income IrII1Jf ofSloo million per year The mIlD can only provide WA the _ that this is armpatible with its own Ii--=ial and prudcnIial i_ and subjoct the I4PfOVII of the Board of Governors lBRDs i_ is dedininS and fuIUrc -e to WA may not be feasible Fuurno lid income pngtSpetlI are under intenJe _ and will be discussed in dclail by 1bc EDs ia tile MIl fuIUrc Rcoeipt ofthesc rnnsf is in fY06

clllepnscats projected net off on IDA r cial flows fnlat HIPC ~ spccif ly the offcct of IDA fiulding HIPC during the wun period and tile porrdIae of IDA cndits by the HIPC Trust FWIlt Thae -Id be ~ IS vcy prdimiDary ati-ince the IICtIIaI HIPC will depaId on Board daiIion ooraming fuIUrc eligibility of coumria Iigtlt HIPC dot relief the _ or deb relief to be poovided Oft IDA debt IIId the ftlCCbaniam for 1bc debt relief in _h

d The fY97 amoun_1S adjus on RITO The fY9S amoun projected SlltJI in IDA 7 FYOI projected surplus in IDAS and fY01 projected ourpluo in IDA9

d Projected disbunemcnts in IDA 7 in fY98 Proie=- _ income fnlat ce ciwBeo equals admiaisnlive Service ciwBeo fnlat CXlUIlIrics in --=noaI eluded

fllnltludes RITO __ ofSDRI7 billionCllried fnlat IDAIO cxcIuda aporcud CIIITY ofRITO ofSDRII billion

Management of RITa Resources

23 The Executive Directors review and approve a three-year framework for RITa resources for the replenishment period9 They also review and approve on an annual basis the use of RITa resources through the Advance Commitment Scheme and the Fifth Dimension Program10 Projected IBRD interest payments eligible for coverage under the Fifth Dimension Program are fast declining and will become negligible (less than USD 10 million) by FY05 By far the largest part of RITa resources is used through the Advance Commitment Scheme

9

10

IDAll Non-Donor Resource Framework FY97-99 IDAlR96-143 dated July 18 1996

Use of IDAs RITO Resources - FY98 IDAlR97-84 dated July 29 1997

4

- 3-

bull Risk of Inadequate Resources for Disbursements After completion of the threeshyyear replenishment period there is a further risk that donor resources (primarily in the form of promissory notes denominated in national currencies4

) might not be sufficient to meet the disbursement needs corresponding to IDAs SDRshydenominated credit commitments IDA is therefore exposed to the risk that the SDR value-upon encashment-of the donor contributions may fall short of the SDR value of the commitments made during the replenishment period This is the source of IDAs currency risk exposure as evidenced on Chart 1 below where encashments after year 3 (area II) represent 80 of total encashments

35 -

Chart I Donor Commitments Compared with Estimated Consolidated Encashment Profile for the lIT and IDAII

----------------~ 30

25 --

-=20 -lt u

E15 -

10

31

Donor commitments ie note deposits ( 00 over 3 years)

Encashments to meet disbursement obligations

0~~--~----------4-----------------______ ~ ________ ~ o 3 Year 6

1 Eruashmcnts (after year 3) disbursements are made in SDR but encashments are made in national cummcics 21 Donor resources encasbed in nalioDal CUJTCDCics and disbursed in SDR through year 3 31 Donor resounes expressed in SDR but paid in national currcncics

9

By the end of the IDAll replenishment period encashments will represent 935 of the donor contributions on a regular encashment schedule and 1169 of contributions on an accderated encashment schedule About 90 of donor contributions will still be in the form of promissory notes at the end of the IDAII replenishment period

-4-

Steps Taken to Reduce Risks

10 IDA has taken a number of measures to ~educe its currency risk exposures

These measures include

bull In IDA6 IDA began to denominate credits in SDR rather than USD Since the SDR is a basket of currencies this reduces IDAs currency risk relative to that which would be associated with making commitments in any single currency

bull During the IDA6 negotiations donors as a group agreed that it would be preferable to denominate donor contributions in SDR IDA urged donors to pledge in SDR and a few agreed to do SO6 However most donors have continued to denominate their contributions in their national currency

bull In IDA9 and IDA10 donors whose annual rate of inflation was higher than 15 (during a specified time period) agreed to denominate their contributions in SDR This provision was also part of the IDA 1 1 replenishment agreement with the threshold inflation rate reduced to 10 In IDAll this provision applied to eight donors-representing 071 of donor contributions

The bulk of donor contributions is therefore still denominated in a basket of currencies that is different from the SDR Therefore the relative value of donor resources vis-a-vis IDAs disbursement obligations fluctuates as a function of exchange rate movements

11 IDA recognizes that the risk resulting from the currency mismatch between donor contributions and credit commitments can be mitigated to a greater extent when both donor resources and RITO resources are managed together In particular IDA manages the currency composition of its liquid assets-mainly composed of RITO resources-in order to reduce its currency risk exposure This is discussed in Section ill of the paper

s

6

The earliest replenishment agreements included a maintenance of value (MOV) obligation for donors under which they were required to maintain the value of their respective contributions in USD the currency in which IDA credits were denominated This requirement ceased in IDA4

In IDAlO Austria Germany the Netherlands and donor countries with an annual rate of inflation higher than 15 denominated their contributions in SDR In IDAll the Netherlands and donor countries with an annual rate of inflation higher than 10 denominated their contributions in SDR In IDA12 the Netherlands expeCts to contribute in NLG or in euro

~ 5 ~

Encashment of Donor Resources

12 IDA draws down donor contributions on an approximately pro rata basis among donors in order to meet operational commitments and to maintain a reasonable working cash balance During the replenishment discussions donors are provided with an estimated schedule for the encashment of their contributions This estimated schedule is based on the expected composition of the lending program the pace of disbursements and the practice of maintaining a cushion of donor liquidity equivalent to about 6 weeks of disbursements

13 In IDAlO most donors agreed to participate in a fixed encashment scheme that encashes donor resources at a faster pace than disbursement needs in order to provide IDA with additional resources by way of generating additional investment income Under the provisions of the ITF and IDA 1 1 replenishment agreements a number of donors decided to continue encashing their contributions on a fixed and accelerated basis For the ITF they include Botswana Brazil Denmark France Hungary Ireland Japan Korea Netherlands Norway Poland and Sweden For IDA 1 1 they include Botswana Brazil Denmark Hungary Ireland Korea Norway Poland and Sweden

14 For budgetary planning purposes donors usually request IDA to provide updated encashment schedules to them on an annual basis Encashment projections are updated based on the current pace of disbursements as well as the encashment status of individual donors For existing replenishments (up to and including IDA11) total encashments are expected to stay roughly at the current level of about $5 billion through FYOO The pace of encashments thereafter will depend primarily on the size of IDA12 and subsequent replenishments Table 1 shows one scenario for lending levels and future donor commitments-the declining trend of the latter reflecting the expectation of a transition to self-sustainability over the next 10 to 15 years

1

Table 1 Self-Sustainability Scenario for IDA12-IDA18

Replenishment IDA12 IDA 13 IDA 14 IDA15 IDA16 IDA17

Lending Program (SDR billion)

160 158 147 140 141 144

Donor Contributions (SD R billion)

94 92 81 72 27 09

A brief outline of the expected transition to self-sustainability can be found in Annex 1

-6-

15 These estimates of future donor contributions together with donor commitments through IDAll suggest an encashment profile with fluctuations which may create budgetary planning difficulties for some donors Although projected encashment profiles vary for each donor the projected aggregate profile in Chart 2 is representative of individual encashment profiles which to a large extent reflect the impact of the fixed and accelerated encashment schedule adopted by donors in IDAI0

Chart 2 IDA Projected Encashments

IDA Projected Encashments

4500 -

~ 3500 1

2500 ~

E

iIIIfIIII = 2S C - 2 ~

~ i2 sect gt- gt- gt- c ~ -

16 In the past it has been IDAs practice to accomodate requests by individual donors for changes in the pace of their encashment-provided that the requested proftle differs from that being applied to other donors by less than 10 per year that any shortfall is made up the following year and that the present value of the encashment profile is not significantly affected

17 With the provisos mentioned in the previous paragraph IDA is financially indifferent between the range of possible encashrnent paths which are consistent with the expected evolution of RITO resources Since the projected rise-and-dip profile may be of concern to many donors we would welcome views on what flexibility IDA should exercise and on whether donors would like to consider approaches which would permit them to face smoother encashment profJles over time-while maintaining the present value of donor transfers to IDA at the intended level

-7-

II RITe Resources

Table 2 IDA Funding Framework SDR billion

IDA9 IDA10 ITF amp IDA11 Actual Actual Planned

FY91-93 FY94-96 FY97-99

A Lending fl 1421 1318 1326

B Donor contributions pledged 1122 1236 668

C Actual donor contributions during period 1112 1114 800

D from current replenishment pledge cI 1112 1104 668

E from previous replenishments al bI 010 132

F RITO resources 378 376 636

G IBRD dl 067 070 086

H Advance commitments eI 188 190 353

L Carry-over of previous RITO resources fl OSO 070 172 J Fifth dimension 044 046 025

K Tota donor contributions and RITO (C + F) 1490 1490 1436

L Total carryover from previous resources (E + J) 080 080 304

Note Details may not acid up becaIse of lCIUIlding

81 IDA 10 Repruents IOAS cantributions from the US paid during the lOA 10 period and lie corresponding proma release

from Germany III lOA 11 Represenlll IDA 10 canIibuIionS from the US paid during the lOA 11 period the ~ proma IIIIIIase from

rJ IOA11 figunIs vakIed a 12131197 exchange rates

dI The FY99 amount 01 USO 300 million I1IfIIIcts the undeIstanding readied for IDA 11

III Include surpluses from the cIoIIing of the Special Fund and the FY84 AIxIcu1I of USO 600 million (I0A10 period)

IOA7 of USO 100 million (10A11 period) and IDAB of USO 480 million (IOA12 period)

fI The 10M ~ inCludes SOR 190 million ~from 10AI SOR 130 million es part of the Gull Assistance Program

and SOR 4n milliOn from IQ-IOAS India CIIICIIIIIatio 10A91ending iraIcIes SOR 4n million in recommiIrnent$lO India

Sources of RITO Resources

18 RITO resources consist of reflows investment income net income transfers from mRD and any additional resources such as service charges paid to IDA net of administrative expenses and residual resources from past replenishments) As can be seen in Table 2 RITO resources have been playing an increasing role in the funding of IDA RITO resources which funded 25 of IDA9 and IDA10 are expected to fund 48 of IDA 11 and the ITF

- 8 -

19 mRD Net Income Transfers Allocations of mRD net income are governed by a medium-term frameworks under which the first priority is assuring the adequacy of mRD reserves In the face of a declining trend in mRD net income and growing pressures to increase reserves due to a higher portfolio risk the amount of net income available for other uses-including transfers to IDA-is expected to decline sharply in FY98 The future levels of mRD net income and the amounts required for allocation to reserves are not certain Thus the amounts available for other uses cannot be determined in advance The mRDs Articles of Agreement require that the disposition of net income be authorized by its Board of Governors after such income has been earned and an amount has been allocated for reserves adequacy Therefore mRD cannot pledge transfers from future net income As a result expected contributions from IBRD during a replenishment and possible future contributions should be treated differently from donor pledges

Uses of RITO Resources

20 In addition to serving as the primary buffer against unexpected financial shocks RITO resources enable IDA to finance both new IDA credits through advance commitments and the Fifth Dimension Program

21 Under the Advance Commitment Scheme IDA commits RITO resources that are expected to become available in the coming years in advance of their actual receipt Because IDA credits disburse over several years there is a time lag between credit approval and cash requirements It is therefore possible to rely on IDA expected inflows to meet future disbursement obligations Reflows (which represent the largest component of IDAs expected inflows) and future investment income increase IDAs commitment authority through the Advance Commitment Scheme

22 The other use of RITO resources is the Fifth Dimension Program which was established to assist IDA countries that are no longer able to borrow on IBRD terms (ie IDA-only countries) but have outstanding mRD debt The facility allocates on an annual basis additional resources to IDA-only countries that meet specific requirements in proportion to a countrys interest payments on its mRD debt Only loans approved by the Executive Directors prior to the creation of the program (on September 23 1988) are covered Since Fifth Dimension credits are provided as a lump-sum supplement to adjustment credits they are fast-disbursing and they need to be financed by RITO resources that are available in cash or expected to become so within the coming year

8 Medium-Term Oudook and Policy on Annual Allocation of Net Income R90-193 dated September 211990 as revised in SecM90-14791 dated November 271990 and in R97-1751 datedJuly 181997 and R97-1752 dated July 301997

~9-

Table 3 Uses ofRITO Resource (USD million excel SDR million as noted)

AsW1 tmialtd lD6ll mall 112613 lIol~

~ fr22 ill m2 fYoo EYQ FY02 fY03 FY04 ll2l FY06 FY07 FYOS

IUTO Position I (1IltIillaing r bull 11 hlr 3687 4410 4650 4210 3699 3789 3295 3332 2331 1338 1432 82S

Addi_ Dotrio FY 2 Repaymentgt ai 615 679 828 971 1171 1376 1572 1759 1963 2163 2332 2558

]nvatmcnt income 275 251 241 217 205 197 185 165 120 98 87 64

4 mIlD Net Income Transfer bl 600 300 bl bI hi hi 300 900

5 NO offect of punbue of IDA cndi1S by HIPC cJ 134 25 28 207 228 middot29 middot32 middot36 -42 -45 -48

6 ou inOows d 297 232 0 0 486 0 602 0 0 0 0 0

1 TouIlal1ow 1181 1596 1094 1216 2069 1801 2630 1892 2047 3119 2374 2574

tI Dotrill FY 8 lgtisbwsenenlS on prior IJenihm IIId

contribution to administrative expenses e 0 131 0 0 0 0 0 0 0 0 0 0

9 Disbursements on advance commitments and commitmerus Ipinst net income DIIlSfm 910 1112 1450 1608 1938 2261 2513 2879 lO32 l025 2918 2964

10 DisbursemcnlS on Fifth DimenslOft CRdils 154 113 54 59 41 28 20 14 8 0 0 0

II TouIOcn- 1064 1356 1534 1727 1979 2295 2593 2893 3040 3025 2918 2964

~ 123 240 -440 middot511 90 -494 37 middot1001 99l 94 6Q4 middot390

RITOP 12 (Ead orfiocal Year) 4410 4650 4210 3699 3789 3295 3332 2331 1338 1432 828 438

Mcmoicems _ b)l1UTO RaouICD

3 Advance CommiD1 (SDR) 783 944 2423f1 1950 1950 1950 2200 2200 2200 2200 2200 2200 14 IuIvance Commi1m u (USD) 1096 1274 3211 2633 2633 2633 2970 2910 2970 2970 2970 2970 IS Fifth Dim i1m Crediu (SDR) 110 54 62 44 30 21 IS 10 6 0 0 0 16 Fifth Di ion Credits (USD) 154 III 54 59 41 28 20 14 8 0 0 0

Noe SDRIUSD excIwIgc tale - 13 5 Note DOIalla may _ add up due rounding

aI no IlOl iIgtdude npaymoms from CXlUIlIrics in w IIIIIIIS 1gt1 The fY91 and FY9S II1II_ IOIISIII rnnsf of 5300 million per year from mIlD lid m- IIId 5300 million from ourpl

RdlectiJIg theundenandins_ed for IDAll1II mllDrnnsferofS3OO million has been for fY99(to benrzived in rY03) Projections IigtltfY00-02 n working assumplicm ofllle COIIWruaUonofmllD income IrII1Jf ofSloo million per year The mIlD can only provide WA the _ that this is armpatible with its own Ii--=ial and prudcnIial i_ and subjoct the I4PfOVII of the Board of Governors lBRDs i_ is dedininS and fuIUrc -e to WA may not be feasible Fuurno lid income pngtSpetlI are under intenJe _ and will be discussed in dclail by 1bc EDs ia tile MIl fuIUrc Rcoeipt ofthesc rnnsf is in fY06

clllepnscats projected net off on IDA r cial flows fnlat HIPC ~ spccif ly the offcct of IDA fiulding HIPC during the wun period and tile porrdIae of IDA cndits by the HIPC Trust FWIlt Thae -Id be ~ IS vcy prdimiDary ati-ince the IICtIIaI HIPC will depaId on Board daiIion ooraming fuIUrc eligibility of coumria Iigtlt HIPC dot relief the _ or deb relief to be poovided Oft IDA debt IIId the ftlCCbaniam for 1bc debt relief in _h

d The fY97 amoun_1S adjus on RITO The fY9S amoun projected SlltJI in IDA 7 FYOI projected surplus in IDAS and fY01 projected ourpluo in IDA9

d Projected disbunemcnts in IDA 7 in fY98 Proie=- _ income fnlat ce ciwBeo equals admiaisnlive Service ciwBeo fnlat CXlUIlIrics in --=noaI eluded

fllnltludes RITO __ ofSDRI7 billionCllried fnlat IDAIO cxcIuda aporcud CIIITY ofRITO ofSDRII billion

Management of RITa Resources

23 The Executive Directors review and approve a three-year framework for RITa resources for the replenishment period9 They also review and approve on an annual basis the use of RITa resources through the Advance Commitment Scheme and the Fifth Dimension Program10 Projected IBRD interest payments eligible for coverage under the Fifth Dimension Program are fast declining and will become negligible (less than USD 10 million) by FY05 By far the largest part of RITa resources is used through the Advance Commitment Scheme

9

10

IDAll Non-Donor Resource Framework FY97-99 IDAlR96-143 dated July 18 1996

Use of IDAs RITO Resources - FY98 IDAlR97-84 dated July 29 1997

-4-

Steps Taken to Reduce Risks

10 IDA has taken a number of measures to ~educe its currency risk exposures

These measures include

bull In IDA6 IDA began to denominate credits in SDR rather than USD Since the SDR is a basket of currencies this reduces IDAs currency risk relative to that which would be associated with making commitments in any single currency

bull During the IDA6 negotiations donors as a group agreed that it would be preferable to denominate donor contributions in SDR IDA urged donors to pledge in SDR and a few agreed to do SO6 However most donors have continued to denominate their contributions in their national currency

bull In IDA9 and IDA10 donors whose annual rate of inflation was higher than 15 (during a specified time period) agreed to denominate their contributions in SDR This provision was also part of the IDA 1 1 replenishment agreement with the threshold inflation rate reduced to 10 In IDAll this provision applied to eight donors-representing 071 of donor contributions

The bulk of donor contributions is therefore still denominated in a basket of currencies that is different from the SDR Therefore the relative value of donor resources vis-a-vis IDAs disbursement obligations fluctuates as a function of exchange rate movements

11 IDA recognizes that the risk resulting from the currency mismatch between donor contributions and credit commitments can be mitigated to a greater extent when both donor resources and RITO resources are managed together In particular IDA manages the currency composition of its liquid assets-mainly composed of RITO resources-in order to reduce its currency risk exposure This is discussed in Section ill of the paper

s

6

The earliest replenishment agreements included a maintenance of value (MOV) obligation for donors under which they were required to maintain the value of their respective contributions in USD the currency in which IDA credits were denominated This requirement ceased in IDA4

In IDAlO Austria Germany the Netherlands and donor countries with an annual rate of inflation higher than 15 denominated their contributions in SDR In IDAll the Netherlands and donor countries with an annual rate of inflation higher than 10 denominated their contributions in SDR In IDA12 the Netherlands expeCts to contribute in NLG or in euro

~ 5 ~

Encashment of Donor Resources

12 IDA draws down donor contributions on an approximately pro rata basis among donors in order to meet operational commitments and to maintain a reasonable working cash balance During the replenishment discussions donors are provided with an estimated schedule for the encashment of their contributions This estimated schedule is based on the expected composition of the lending program the pace of disbursements and the practice of maintaining a cushion of donor liquidity equivalent to about 6 weeks of disbursements

13 In IDAlO most donors agreed to participate in a fixed encashment scheme that encashes donor resources at a faster pace than disbursement needs in order to provide IDA with additional resources by way of generating additional investment income Under the provisions of the ITF and IDA 1 1 replenishment agreements a number of donors decided to continue encashing their contributions on a fixed and accelerated basis For the ITF they include Botswana Brazil Denmark France Hungary Ireland Japan Korea Netherlands Norway Poland and Sweden For IDA 1 1 they include Botswana Brazil Denmark Hungary Ireland Korea Norway Poland and Sweden

14 For budgetary planning purposes donors usually request IDA to provide updated encashment schedules to them on an annual basis Encashment projections are updated based on the current pace of disbursements as well as the encashment status of individual donors For existing replenishments (up to and including IDA11) total encashments are expected to stay roughly at the current level of about $5 billion through FYOO The pace of encashments thereafter will depend primarily on the size of IDA12 and subsequent replenishments Table 1 shows one scenario for lending levels and future donor commitments-the declining trend of the latter reflecting the expectation of a transition to self-sustainability over the next 10 to 15 years

1

Table 1 Self-Sustainability Scenario for IDA12-IDA18

Replenishment IDA12 IDA 13 IDA 14 IDA15 IDA16 IDA17

Lending Program (SDR billion)

160 158 147 140 141 144

Donor Contributions (SD R billion)

94 92 81 72 27 09

A brief outline of the expected transition to self-sustainability can be found in Annex 1

-6-

15 These estimates of future donor contributions together with donor commitments through IDAll suggest an encashment profile with fluctuations which may create budgetary planning difficulties for some donors Although projected encashment profiles vary for each donor the projected aggregate profile in Chart 2 is representative of individual encashment profiles which to a large extent reflect the impact of the fixed and accelerated encashment schedule adopted by donors in IDAI0

Chart 2 IDA Projected Encashments

IDA Projected Encashments

4500 -

~ 3500 1

2500 ~

E

iIIIfIIII = 2S C - 2 ~

~ i2 sect gt- gt- gt- c ~ -

16 In the past it has been IDAs practice to accomodate requests by individual donors for changes in the pace of their encashment-provided that the requested proftle differs from that being applied to other donors by less than 10 per year that any shortfall is made up the following year and that the present value of the encashment profile is not significantly affected

17 With the provisos mentioned in the previous paragraph IDA is financially indifferent between the range of possible encashrnent paths which are consistent with the expected evolution of RITO resources Since the projected rise-and-dip profile may be of concern to many donors we would welcome views on what flexibility IDA should exercise and on whether donors would like to consider approaches which would permit them to face smoother encashment profJles over time-while maintaining the present value of donor transfers to IDA at the intended level

-7-

II RITe Resources

Table 2 IDA Funding Framework SDR billion

IDA9 IDA10 ITF amp IDA11 Actual Actual Planned

FY91-93 FY94-96 FY97-99

A Lending fl 1421 1318 1326

B Donor contributions pledged 1122 1236 668

C Actual donor contributions during period 1112 1114 800

D from current replenishment pledge cI 1112 1104 668

E from previous replenishments al bI 010 132

F RITO resources 378 376 636

G IBRD dl 067 070 086

H Advance commitments eI 188 190 353

L Carry-over of previous RITO resources fl OSO 070 172 J Fifth dimension 044 046 025

K Tota donor contributions and RITO (C + F) 1490 1490 1436

L Total carryover from previous resources (E + J) 080 080 304

Note Details may not acid up becaIse of lCIUIlding

81 IDA 10 Repruents IOAS cantributions from the US paid during the lOA 10 period and lie corresponding proma release

from Germany III lOA 11 Represenlll IDA 10 canIibuIionS from the US paid during the lOA 11 period the ~ proma IIIIIIase from

rJ IOA11 figunIs vakIed a 12131197 exchange rates

dI The FY99 amount 01 USO 300 million I1IfIIIcts the undeIstanding readied for IDA 11

III Include surpluses from the cIoIIing of the Special Fund and the FY84 AIxIcu1I of USO 600 million (I0A10 period)

IOA7 of USO 100 million (10A11 period) and IDAB of USO 480 million (IOA12 period)

fI The 10M ~ inCludes SOR 190 million ~from 10AI SOR 130 million es part of the Gull Assistance Program

and SOR 4n milliOn from IQ-IOAS India CIIICIIIIIatio 10A91ending iraIcIes SOR 4n million in recommiIrnent$lO India

Sources of RITO Resources

18 RITO resources consist of reflows investment income net income transfers from mRD and any additional resources such as service charges paid to IDA net of administrative expenses and residual resources from past replenishments) As can be seen in Table 2 RITO resources have been playing an increasing role in the funding of IDA RITO resources which funded 25 of IDA9 and IDA10 are expected to fund 48 of IDA 11 and the ITF

- 8 -

19 mRD Net Income Transfers Allocations of mRD net income are governed by a medium-term frameworks under which the first priority is assuring the adequacy of mRD reserves In the face of a declining trend in mRD net income and growing pressures to increase reserves due to a higher portfolio risk the amount of net income available for other uses-including transfers to IDA-is expected to decline sharply in FY98 The future levels of mRD net income and the amounts required for allocation to reserves are not certain Thus the amounts available for other uses cannot be determined in advance The mRDs Articles of Agreement require that the disposition of net income be authorized by its Board of Governors after such income has been earned and an amount has been allocated for reserves adequacy Therefore mRD cannot pledge transfers from future net income As a result expected contributions from IBRD during a replenishment and possible future contributions should be treated differently from donor pledges

Uses of RITO Resources

20 In addition to serving as the primary buffer against unexpected financial shocks RITO resources enable IDA to finance both new IDA credits through advance commitments and the Fifth Dimension Program

21 Under the Advance Commitment Scheme IDA commits RITO resources that are expected to become available in the coming years in advance of their actual receipt Because IDA credits disburse over several years there is a time lag between credit approval and cash requirements It is therefore possible to rely on IDA expected inflows to meet future disbursement obligations Reflows (which represent the largest component of IDAs expected inflows) and future investment income increase IDAs commitment authority through the Advance Commitment Scheme

22 The other use of RITO resources is the Fifth Dimension Program which was established to assist IDA countries that are no longer able to borrow on IBRD terms (ie IDA-only countries) but have outstanding mRD debt The facility allocates on an annual basis additional resources to IDA-only countries that meet specific requirements in proportion to a countrys interest payments on its mRD debt Only loans approved by the Executive Directors prior to the creation of the program (on September 23 1988) are covered Since Fifth Dimension credits are provided as a lump-sum supplement to adjustment credits they are fast-disbursing and they need to be financed by RITO resources that are available in cash or expected to become so within the coming year

8 Medium-Term Oudook and Policy on Annual Allocation of Net Income R90-193 dated September 211990 as revised in SecM90-14791 dated November 271990 and in R97-1751 datedJuly 181997 and R97-1752 dated July 301997

~9-

Table 3 Uses ofRITO Resource (USD million excel SDR million as noted)

AsW1 tmialtd lD6ll mall 112613 lIol~

~ fr22 ill m2 fYoo EYQ FY02 fY03 FY04 ll2l FY06 FY07 FYOS

IUTO Position I (1IltIillaing r bull 11 hlr 3687 4410 4650 4210 3699 3789 3295 3332 2331 1338 1432 82S

Addi_ Dotrio FY 2 Repaymentgt ai 615 679 828 971 1171 1376 1572 1759 1963 2163 2332 2558

]nvatmcnt income 275 251 241 217 205 197 185 165 120 98 87 64

4 mIlD Net Income Transfer bl 600 300 bl bI hi hi 300 900

5 NO offect of punbue of IDA cndi1S by HIPC cJ 134 25 28 207 228 middot29 middot32 middot36 -42 -45 -48

6 ou inOows d 297 232 0 0 486 0 602 0 0 0 0 0

1 TouIlal1ow 1181 1596 1094 1216 2069 1801 2630 1892 2047 3119 2374 2574

tI Dotrill FY 8 lgtisbwsenenlS on prior IJenihm IIId

contribution to administrative expenses e 0 131 0 0 0 0 0 0 0 0 0 0

9 Disbursements on advance commitments and commitmerus Ipinst net income DIIlSfm 910 1112 1450 1608 1938 2261 2513 2879 lO32 l025 2918 2964

10 DisbursemcnlS on Fifth DimenslOft CRdils 154 113 54 59 41 28 20 14 8 0 0 0

II TouIOcn- 1064 1356 1534 1727 1979 2295 2593 2893 3040 3025 2918 2964

~ 123 240 -440 middot511 90 -494 37 middot1001 99l 94 6Q4 middot390

RITOP 12 (Ead orfiocal Year) 4410 4650 4210 3699 3789 3295 3332 2331 1338 1432 828 438

Mcmoicems _ b)l1UTO RaouICD

3 Advance CommiD1 (SDR) 783 944 2423f1 1950 1950 1950 2200 2200 2200 2200 2200 2200 14 IuIvance Commi1m u (USD) 1096 1274 3211 2633 2633 2633 2970 2910 2970 2970 2970 2970 IS Fifth Dim i1m Crediu (SDR) 110 54 62 44 30 21 IS 10 6 0 0 0 16 Fifth Di ion Credits (USD) 154 III 54 59 41 28 20 14 8 0 0 0

Noe SDRIUSD excIwIgc tale - 13 5 Note DOIalla may _ add up due rounding

aI no IlOl iIgtdude npaymoms from CXlUIlIrics in w IIIIIIIS 1gt1 The fY91 and FY9S II1II_ IOIISIII rnnsf of 5300 million per year from mIlD lid m- IIId 5300 million from ourpl

RdlectiJIg theundenandins_ed for IDAll1II mllDrnnsferofS3OO million has been for fY99(to benrzived in rY03) Projections IigtltfY00-02 n working assumplicm ofllle COIIWruaUonofmllD income IrII1Jf ofSloo million per year The mIlD can only provide WA the _ that this is armpatible with its own Ii--=ial and prudcnIial i_ and subjoct the I4PfOVII of the Board of Governors lBRDs i_ is dedininS and fuIUrc -e to WA may not be feasible Fuurno lid income pngtSpetlI are under intenJe _ and will be discussed in dclail by 1bc EDs ia tile MIl fuIUrc Rcoeipt ofthesc rnnsf is in fY06

clllepnscats projected net off on IDA r cial flows fnlat HIPC ~ spccif ly the offcct of IDA fiulding HIPC during the wun period and tile porrdIae of IDA cndits by the HIPC Trust FWIlt Thae -Id be ~ IS vcy prdimiDary ati-ince the IICtIIaI HIPC will depaId on Board daiIion ooraming fuIUrc eligibility of coumria Iigtlt HIPC dot relief the _ or deb relief to be poovided Oft IDA debt IIId the ftlCCbaniam for 1bc debt relief in _h

d The fY97 amoun_1S adjus on RITO The fY9S amoun projected SlltJI in IDA 7 FYOI projected surplus in IDAS and fY01 projected ourpluo in IDA9

d Projected disbunemcnts in IDA 7 in fY98 Proie=- _ income fnlat ce ciwBeo equals admiaisnlive Service ciwBeo fnlat CXlUIlIrics in --=noaI eluded

fllnltludes RITO __ ofSDRI7 billionCllried fnlat IDAIO cxcIuda aporcud CIIITY ofRITO ofSDRII billion

Management of RITa Resources

23 The Executive Directors review and approve a three-year framework for RITa resources for the replenishment period9 They also review and approve on an annual basis the use of RITa resources through the Advance Commitment Scheme and the Fifth Dimension Program10 Projected IBRD interest payments eligible for coverage under the Fifth Dimension Program are fast declining and will become negligible (less than USD 10 million) by FY05 By far the largest part of RITa resources is used through the Advance Commitment Scheme

9

10

IDAll Non-Donor Resource Framework FY97-99 IDAlR96-143 dated July 18 1996

Use of IDAs RITO Resources - FY98 IDAlR97-84 dated July 29 1997

~ 5 ~

Encashment of Donor Resources

12 IDA draws down donor contributions on an approximately pro rata basis among donors in order to meet operational commitments and to maintain a reasonable working cash balance During the replenishment discussions donors are provided with an estimated schedule for the encashment of their contributions This estimated schedule is based on the expected composition of the lending program the pace of disbursements and the practice of maintaining a cushion of donor liquidity equivalent to about 6 weeks of disbursements

13 In IDAlO most donors agreed to participate in a fixed encashment scheme that encashes donor resources at a faster pace than disbursement needs in order to provide IDA with additional resources by way of generating additional investment income Under the provisions of the ITF and IDA 1 1 replenishment agreements a number of donors decided to continue encashing their contributions on a fixed and accelerated basis For the ITF they include Botswana Brazil Denmark France Hungary Ireland Japan Korea Netherlands Norway Poland and Sweden For IDA 1 1 they include Botswana Brazil Denmark Hungary Ireland Korea Norway Poland and Sweden

14 For budgetary planning purposes donors usually request IDA to provide updated encashment schedules to them on an annual basis Encashment projections are updated based on the current pace of disbursements as well as the encashment status of individual donors For existing replenishments (up to and including IDA11) total encashments are expected to stay roughly at the current level of about $5 billion through FYOO The pace of encashments thereafter will depend primarily on the size of IDA12 and subsequent replenishments Table 1 shows one scenario for lending levels and future donor commitments-the declining trend of the latter reflecting the expectation of a transition to self-sustainability over the next 10 to 15 years

1

Table 1 Self-Sustainability Scenario for IDA12-IDA18

Replenishment IDA12 IDA 13 IDA 14 IDA15 IDA16 IDA17

Lending Program (SDR billion)

160 158 147 140 141 144

Donor Contributions (SD R billion)

94 92 81 72 27 09

A brief outline of the expected transition to self-sustainability can be found in Annex 1

-6-

15 These estimates of future donor contributions together with donor commitments through IDAll suggest an encashment profile with fluctuations which may create budgetary planning difficulties for some donors Although projected encashment profiles vary for each donor the projected aggregate profile in Chart 2 is representative of individual encashment profiles which to a large extent reflect the impact of the fixed and accelerated encashment schedule adopted by donors in IDAI0

Chart 2 IDA Projected Encashments

IDA Projected Encashments

4500 -

~ 3500 1

2500 ~

E

iIIIfIIII = 2S C - 2 ~

~ i2 sect gt- gt- gt- c ~ -

16 In the past it has been IDAs practice to accomodate requests by individual donors for changes in the pace of their encashment-provided that the requested proftle differs from that being applied to other donors by less than 10 per year that any shortfall is made up the following year and that the present value of the encashment profile is not significantly affected

17 With the provisos mentioned in the previous paragraph IDA is financially indifferent between the range of possible encashrnent paths which are consistent with the expected evolution of RITO resources Since the projected rise-and-dip profile may be of concern to many donors we would welcome views on what flexibility IDA should exercise and on whether donors would like to consider approaches which would permit them to face smoother encashment profJles over time-while maintaining the present value of donor transfers to IDA at the intended level

-7-

II RITe Resources

Table 2 IDA Funding Framework SDR billion

IDA9 IDA10 ITF amp IDA11 Actual Actual Planned

FY91-93 FY94-96 FY97-99

A Lending fl 1421 1318 1326

B Donor contributions pledged 1122 1236 668

C Actual donor contributions during period 1112 1114 800

D from current replenishment pledge cI 1112 1104 668

E from previous replenishments al bI 010 132

F RITO resources 378 376 636

G IBRD dl 067 070 086

H Advance commitments eI 188 190 353

L Carry-over of previous RITO resources fl OSO 070 172 J Fifth dimension 044 046 025

K Tota donor contributions and RITO (C + F) 1490 1490 1436

L Total carryover from previous resources (E + J) 080 080 304

Note Details may not acid up becaIse of lCIUIlding

81 IDA 10 Repruents IOAS cantributions from the US paid during the lOA 10 period and lie corresponding proma release

from Germany III lOA 11 Represenlll IDA 10 canIibuIionS from the US paid during the lOA 11 period the ~ proma IIIIIIase from

rJ IOA11 figunIs vakIed a 12131197 exchange rates

dI The FY99 amount 01 USO 300 million I1IfIIIcts the undeIstanding readied for IDA 11

III Include surpluses from the cIoIIing of the Special Fund and the FY84 AIxIcu1I of USO 600 million (I0A10 period)

IOA7 of USO 100 million (10A11 period) and IDAB of USO 480 million (IOA12 period)

fI The 10M ~ inCludes SOR 190 million ~from 10AI SOR 130 million es part of the Gull Assistance Program

and SOR 4n milliOn from IQ-IOAS India CIIICIIIIIatio 10A91ending iraIcIes SOR 4n million in recommiIrnent$lO India

Sources of RITO Resources

18 RITO resources consist of reflows investment income net income transfers from mRD and any additional resources such as service charges paid to IDA net of administrative expenses and residual resources from past replenishments) As can be seen in Table 2 RITO resources have been playing an increasing role in the funding of IDA RITO resources which funded 25 of IDA9 and IDA10 are expected to fund 48 of IDA 11 and the ITF

- 8 -

19 mRD Net Income Transfers Allocations of mRD net income are governed by a medium-term frameworks under which the first priority is assuring the adequacy of mRD reserves In the face of a declining trend in mRD net income and growing pressures to increase reserves due to a higher portfolio risk the amount of net income available for other uses-including transfers to IDA-is expected to decline sharply in FY98 The future levels of mRD net income and the amounts required for allocation to reserves are not certain Thus the amounts available for other uses cannot be determined in advance The mRDs Articles of Agreement require that the disposition of net income be authorized by its Board of Governors after such income has been earned and an amount has been allocated for reserves adequacy Therefore mRD cannot pledge transfers from future net income As a result expected contributions from IBRD during a replenishment and possible future contributions should be treated differently from donor pledges

Uses of RITO Resources

20 In addition to serving as the primary buffer against unexpected financial shocks RITO resources enable IDA to finance both new IDA credits through advance commitments and the Fifth Dimension Program

21 Under the Advance Commitment Scheme IDA commits RITO resources that are expected to become available in the coming years in advance of their actual receipt Because IDA credits disburse over several years there is a time lag between credit approval and cash requirements It is therefore possible to rely on IDA expected inflows to meet future disbursement obligations Reflows (which represent the largest component of IDAs expected inflows) and future investment income increase IDAs commitment authority through the Advance Commitment Scheme

22 The other use of RITO resources is the Fifth Dimension Program which was established to assist IDA countries that are no longer able to borrow on IBRD terms (ie IDA-only countries) but have outstanding mRD debt The facility allocates on an annual basis additional resources to IDA-only countries that meet specific requirements in proportion to a countrys interest payments on its mRD debt Only loans approved by the Executive Directors prior to the creation of the program (on September 23 1988) are covered Since Fifth Dimension credits are provided as a lump-sum supplement to adjustment credits they are fast-disbursing and they need to be financed by RITO resources that are available in cash or expected to become so within the coming year

8 Medium-Term Oudook and Policy on Annual Allocation of Net Income R90-193 dated September 211990 as revised in SecM90-14791 dated November 271990 and in R97-1751 datedJuly 181997 and R97-1752 dated July 301997

~9-

Table 3 Uses ofRITO Resource (USD million excel SDR million as noted)

AsW1 tmialtd lD6ll mall 112613 lIol~

~ fr22 ill m2 fYoo EYQ FY02 fY03 FY04 ll2l FY06 FY07 FYOS

IUTO Position I (1IltIillaing r bull 11 hlr 3687 4410 4650 4210 3699 3789 3295 3332 2331 1338 1432 82S

Addi_ Dotrio FY 2 Repaymentgt ai 615 679 828 971 1171 1376 1572 1759 1963 2163 2332 2558

]nvatmcnt income 275 251 241 217 205 197 185 165 120 98 87 64

4 mIlD Net Income Transfer bl 600 300 bl bI hi hi 300 900

5 NO offect of punbue of IDA cndi1S by HIPC cJ 134 25 28 207 228 middot29 middot32 middot36 -42 -45 -48

6 ou inOows d 297 232 0 0 486 0 602 0 0 0 0 0

1 TouIlal1ow 1181 1596 1094 1216 2069 1801 2630 1892 2047 3119 2374 2574

tI Dotrill FY 8 lgtisbwsenenlS on prior IJenihm IIId

contribution to administrative expenses e 0 131 0 0 0 0 0 0 0 0 0 0

9 Disbursements on advance commitments and commitmerus Ipinst net income DIIlSfm 910 1112 1450 1608 1938 2261 2513 2879 lO32 l025 2918 2964

10 DisbursemcnlS on Fifth DimenslOft CRdils 154 113 54 59 41 28 20 14 8 0 0 0

II TouIOcn- 1064 1356 1534 1727 1979 2295 2593 2893 3040 3025 2918 2964

~ 123 240 -440 middot511 90 -494 37 middot1001 99l 94 6Q4 middot390

RITOP 12 (Ead orfiocal Year) 4410 4650 4210 3699 3789 3295 3332 2331 1338 1432 828 438

Mcmoicems _ b)l1UTO RaouICD

3 Advance CommiD1 (SDR) 783 944 2423f1 1950 1950 1950 2200 2200 2200 2200 2200 2200 14 IuIvance Commi1m u (USD) 1096 1274 3211 2633 2633 2633 2970 2910 2970 2970 2970 2970 IS Fifth Dim i1m Crediu (SDR) 110 54 62 44 30 21 IS 10 6 0 0 0 16 Fifth Di ion Credits (USD) 154 III 54 59 41 28 20 14 8 0 0 0

Noe SDRIUSD excIwIgc tale - 13 5 Note DOIalla may _ add up due rounding

aI no IlOl iIgtdude npaymoms from CXlUIlIrics in w IIIIIIIS 1gt1 The fY91 and FY9S II1II_ IOIISIII rnnsf of 5300 million per year from mIlD lid m- IIId 5300 million from ourpl

RdlectiJIg theundenandins_ed for IDAll1II mllDrnnsferofS3OO million has been for fY99(to benrzived in rY03) Projections IigtltfY00-02 n working assumplicm ofllle COIIWruaUonofmllD income IrII1Jf ofSloo million per year The mIlD can only provide WA the _ that this is armpatible with its own Ii--=ial and prudcnIial i_ and subjoct the I4PfOVII of the Board of Governors lBRDs i_ is dedininS and fuIUrc -e to WA may not be feasible Fuurno lid income pngtSpetlI are under intenJe _ and will be discussed in dclail by 1bc EDs ia tile MIl fuIUrc Rcoeipt ofthesc rnnsf is in fY06

clllepnscats projected net off on IDA r cial flows fnlat HIPC ~ spccif ly the offcct of IDA fiulding HIPC during the wun period and tile porrdIae of IDA cndits by the HIPC Trust FWIlt Thae -Id be ~ IS vcy prdimiDary ati-ince the IICtIIaI HIPC will depaId on Board daiIion ooraming fuIUrc eligibility of coumria Iigtlt HIPC dot relief the _ or deb relief to be poovided Oft IDA debt IIId the ftlCCbaniam for 1bc debt relief in _h

d The fY97 amoun_1S adjus on RITO The fY9S amoun projected SlltJI in IDA 7 FYOI projected surplus in IDAS and fY01 projected ourpluo in IDA9

d Projected disbunemcnts in IDA 7 in fY98 Proie=- _ income fnlat ce ciwBeo equals admiaisnlive Service ciwBeo fnlat CXlUIlIrics in --=noaI eluded

fllnltludes RITO __ ofSDRI7 billionCllried fnlat IDAIO cxcIuda aporcud CIIITY ofRITO ofSDRII billion

Management of RITa Resources

23 The Executive Directors review and approve a three-year framework for RITa resources for the replenishment period9 They also review and approve on an annual basis the use of RITa resources through the Advance Commitment Scheme and the Fifth Dimension Program10 Projected IBRD interest payments eligible for coverage under the Fifth Dimension Program are fast declining and will become negligible (less than USD 10 million) by FY05 By far the largest part of RITa resources is used through the Advance Commitment Scheme

9

10

IDAll Non-Donor Resource Framework FY97-99 IDAlR96-143 dated July 18 1996

Use of IDAs RITO Resources - FY98 IDAlR97-84 dated July 29 1997

-6-

15 These estimates of future donor contributions together with donor commitments through IDAll suggest an encashment profile with fluctuations which may create budgetary planning difficulties for some donors Although projected encashment profiles vary for each donor the projected aggregate profile in Chart 2 is representative of individual encashment profiles which to a large extent reflect the impact of the fixed and accelerated encashment schedule adopted by donors in IDAI0

Chart 2 IDA Projected Encashments

IDA Projected Encashments

4500 -

~ 3500 1

2500 ~

E

iIIIfIIII = 2S C - 2 ~

~ i2 sect gt- gt- gt- c ~ -

16 In the past it has been IDAs practice to accomodate requests by individual donors for changes in the pace of their encashment-provided that the requested proftle differs from that being applied to other donors by less than 10 per year that any shortfall is made up the following year and that the present value of the encashment profile is not significantly affected

17 With the provisos mentioned in the previous paragraph IDA is financially indifferent between the range of possible encashrnent paths which are consistent with the expected evolution of RITO resources Since the projected rise-and-dip profile may be of concern to many donors we would welcome views on what flexibility IDA should exercise and on whether donors would like to consider approaches which would permit them to face smoother encashment profJles over time-while maintaining the present value of donor transfers to IDA at the intended level

-7-

II RITe Resources

Table 2 IDA Funding Framework SDR billion

IDA9 IDA10 ITF amp IDA11 Actual Actual Planned

FY91-93 FY94-96 FY97-99

A Lending fl 1421 1318 1326

B Donor contributions pledged 1122 1236 668

C Actual donor contributions during period 1112 1114 800

D from current replenishment pledge cI 1112 1104 668

E from previous replenishments al bI 010 132

F RITO resources 378 376 636

G IBRD dl 067 070 086

H Advance commitments eI 188 190 353

L Carry-over of previous RITO resources fl OSO 070 172 J Fifth dimension 044 046 025

K Tota donor contributions and RITO (C + F) 1490 1490 1436

L Total carryover from previous resources (E + J) 080 080 304

Note Details may not acid up becaIse of lCIUIlding

81 IDA 10 Repruents IOAS cantributions from the US paid during the lOA 10 period and lie corresponding proma release

from Germany III lOA 11 Represenlll IDA 10 canIibuIionS from the US paid during the lOA 11 period the ~ proma IIIIIIase from

rJ IOA11 figunIs vakIed a 12131197 exchange rates

dI The FY99 amount 01 USO 300 million I1IfIIIcts the undeIstanding readied for IDA 11

III Include surpluses from the cIoIIing of the Special Fund and the FY84 AIxIcu1I of USO 600 million (I0A10 period)

IOA7 of USO 100 million (10A11 period) and IDAB of USO 480 million (IOA12 period)

fI The 10M ~ inCludes SOR 190 million ~from 10AI SOR 130 million es part of the Gull Assistance Program

and SOR 4n milliOn from IQ-IOAS India CIIICIIIIIatio 10A91ending iraIcIes SOR 4n million in recommiIrnent$lO India

Sources of RITO Resources

18 RITO resources consist of reflows investment income net income transfers from mRD and any additional resources such as service charges paid to IDA net of administrative expenses and residual resources from past replenishments) As can be seen in Table 2 RITO resources have been playing an increasing role in the funding of IDA RITO resources which funded 25 of IDA9 and IDA10 are expected to fund 48 of IDA 11 and the ITF

- 8 -

19 mRD Net Income Transfers Allocations of mRD net income are governed by a medium-term frameworks under which the first priority is assuring the adequacy of mRD reserves In the face of a declining trend in mRD net income and growing pressures to increase reserves due to a higher portfolio risk the amount of net income available for other uses-including transfers to IDA-is expected to decline sharply in FY98 The future levels of mRD net income and the amounts required for allocation to reserves are not certain Thus the amounts available for other uses cannot be determined in advance The mRDs Articles of Agreement require that the disposition of net income be authorized by its Board of Governors after such income has been earned and an amount has been allocated for reserves adequacy Therefore mRD cannot pledge transfers from future net income As a result expected contributions from IBRD during a replenishment and possible future contributions should be treated differently from donor pledges

Uses of RITO Resources

20 In addition to serving as the primary buffer against unexpected financial shocks RITO resources enable IDA to finance both new IDA credits through advance commitments and the Fifth Dimension Program

21 Under the Advance Commitment Scheme IDA commits RITO resources that are expected to become available in the coming years in advance of their actual receipt Because IDA credits disburse over several years there is a time lag between credit approval and cash requirements It is therefore possible to rely on IDA expected inflows to meet future disbursement obligations Reflows (which represent the largest component of IDAs expected inflows) and future investment income increase IDAs commitment authority through the Advance Commitment Scheme

22 The other use of RITO resources is the Fifth Dimension Program which was established to assist IDA countries that are no longer able to borrow on IBRD terms (ie IDA-only countries) but have outstanding mRD debt The facility allocates on an annual basis additional resources to IDA-only countries that meet specific requirements in proportion to a countrys interest payments on its mRD debt Only loans approved by the Executive Directors prior to the creation of the program (on September 23 1988) are covered Since Fifth Dimension credits are provided as a lump-sum supplement to adjustment credits they are fast-disbursing and they need to be financed by RITO resources that are available in cash or expected to become so within the coming year

8 Medium-Term Oudook and Policy on Annual Allocation of Net Income R90-193 dated September 211990 as revised in SecM90-14791 dated November 271990 and in R97-1751 datedJuly 181997 and R97-1752 dated July 301997

~9-

Table 3 Uses ofRITO Resource (USD million excel SDR million as noted)

AsW1 tmialtd lD6ll mall 112613 lIol~

~ fr22 ill m2 fYoo EYQ FY02 fY03 FY04 ll2l FY06 FY07 FYOS

IUTO Position I (1IltIillaing r bull 11 hlr 3687 4410 4650 4210 3699 3789 3295 3332 2331 1338 1432 82S

Addi_ Dotrio FY 2 Repaymentgt ai 615 679 828 971 1171 1376 1572 1759 1963 2163 2332 2558

]nvatmcnt income 275 251 241 217 205 197 185 165 120 98 87 64

4 mIlD Net Income Transfer bl 600 300 bl bI hi hi 300 900

5 NO offect of punbue of IDA cndi1S by HIPC cJ 134 25 28 207 228 middot29 middot32 middot36 -42 -45 -48

6 ou inOows d 297 232 0 0 486 0 602 0 0 0 0 0

1 TouIlal1ow 1181 1596 1094 1216 2069 1801 2630 1892 2047 3119 2374 2574

tI Dotrill FY 8 lgtisbwsenenlS on prior IJenihm IIId

contribution to administrative expenses e 0 131 0 0 0 0 0 0 0 0 0 0

9 Disbursements on advance commitments and commitmerus Ipinst net income DIIlSfm 910 1112 1450 1608 1938 2261 2513 2879 lO32 l025 2918 2964

10 DisbursemcnlS on Fifth DimenslOft CRdils 154 113 54 59 41 28 20 14 8 0 0 0

II TouIOcn- 1064 1356 1534 1727 1979 2295 2593 2893 3040 3025 2918 2964

~ 123 240 -440 middot511 90 -494 37 middot1001 99l 94 6Q4 middot390

RITOP 12 (Ead orfiocal Year) 4410 4650 4210 3699 3789 3295 3332 2331 1338 1432 828 438

Mcmoicems _ b)l1UTO RaouICD

3 Advance CommiD1 (SDR) 783 944 2423f1 1950 1950 1950 2200 2200 2200 2200 2200 2200 14 IuIvance Commi1m u (USD) 1096 1274 3211 2633 2633 2633 2970 2910 2970 2970 2970 2970 IS Fifth Dim i1m Crediu (SDR) 110 54 62 44 30 21 IS 10 6 0 0 0 16 Fifth Di ion Credits (USD) 154 III 54 59 41 28 20 14 8 0 0 0

Noe SDRIUSD excIwIgc tale - 13 5 Note DOIalla may _ add up due rounding

aI no IlOl iIgtdude npaymoms from CXlUIlIrics in w IIIIIIIS 1gt1 The fY91 and FY9S II1II_ IOIISIII rnnsf of 5300 million per year from mIlD lid m- IIId 5300 million from ourpl

RdlectiJIg theundenandins_ed for IDAll1II mllDrnnsferofS3OO million has been for fY99(to benrzived in rY03) Projections IigtltfY00-02 n working assumplicm ofllle COIIWruaUonofmllD income IrII1Jf ofSloo million per year The mIlD can only provide WA the _ that this is armpatible with its own Ii--=ial and prudcnIial i_ and subjoct the I4PfOVII of the Board of Governors lBRDs i_ is dedininS and fuIUrc -e to WA may not be feasible Fuurno lid income pngtSpetlI are under intenJe _ and will be discussed in dclail by 1bc EDs ia tile MIl fuIUrc Rcoeipt ofthesc rnnsf is in fY06

clllepnscats projected net off on IDA r cial flows fnlat HIPC ~ spccif ly the offcct of IDA fiulding HIPC during the wun period and tile porrdIae of IDA cndits by the HIPC Trust FWIlt Thae -Id be ~ IS vcy prdimiDary ati-ince the IICtIIaI HIPC will depaId on Board daiIion ooraming fuIUrc eligibility of coumria Iigtlt HIPC dot relief the _ or deb relief to be poovided Oft IDA debt IIId the ftlCCbaniam for 1bc debt relief in _h

d The fY97 amoun_1S adjus on RITO The fY9S amoun projected SlltJI in IDA 7 FYOI projected surplus in IDAS and fY01 projected ourpluo in IDA9

d Projected disbunemcnts in IDA 7 in fY98 Proie=- _ income fnlat ce ciwBeo equals admiaisnlive Service ciwBeo fnlat CXlUIlIrics in --=noaI eluded

fllnltludes RITO __ ofSDRI7 billionCllried fnlat IDAIO cxcIuda aporcud CIIITY ofRITO ofSDRII billion

Management of RITa Resources

23 The Executive Directors review and approve a three-year framework for RITa resources for the replenishment period9 They also review and approve on an annual basis the use of RITa resources through the Advance Commitment Scheme and the Fifth Dimension Program10 Projected IBRD interest payments eligible for coverage under the Fifth Dimension Program are fast declining and will become negligible (less than USD 10 million) by FY05 By far the largest part of RITa resources is used through the Advance Commitment Scheme

9

10

IDAll Non-Donor Resource Framework FY97-99 IDAlR96-143 dated July 18 1996

Use of IDAs RITO Resources - FY98 IDAlR97-84 dated July 29 1997

-7-

II RITe Resources

Table 2 IDA Funding Framework SDR billion

IDA9 IDA10 ITF amp IDA11 Actual Actual Planned

FY91-93 FY94-96 FY97-99

A Lending fl 1421 1318 1326

B Donor contributions pledged 1122 1236 668

C Actual donor contributions during period 1112 1114 800

D from current replenishment pledge cI 1112 1104 668

E from previous replenishments al bI 010 132

F RITO resources 378 376 636

G IBRD dl 067 070 086

H Advance commitments eI 188 190 353

L Carry-over of previous RITO resources fl OSO 070 172 J Fifth dimension 044 046 025

K Tota donor contributions and RITO (C + F) 1490 1490 1436

L Total carryover from previous resources (E + J) 080 080 304

Note Details may not acid up becaIse of lCIUIlding

81 IDA 10 Repruents IOAS cantributions from the US paid during the lOA 10 period and lie corresponding proma release

from Germany III lOA 11 Represenlll IDA 10 canIibuIionS from the US paid during the lOA 11 period the ~ proma IIIIIIase from

rJ IOA11 figunIs vakIed a 12131197 exchange rates

dI The FY99 amount 01 USO 300 million I1IfIIIcts the undeIstanding readied for IDA 11

III Include surpluses from the cIoIIing of the Special Fund and the FY84 AIxIcu1I of USO 600 million (I0A10 period)

IOA7 of USO 100 million (10A11 period) and IDAB of USO 480 million (IOA12 period)

fI The 10M ~ inCludes SOR 190 million ~from 10AI SOR 130 million es part of the Gull Assistance Program

and SOR 4n milliOn from IQ-IOAS India CIIICIIIIIatio 10A91ending iraIcIes SOR 4n million in recommiIrnent$lO India

Sources of RITO Resources

18 RITO resources consist of reflows investment income net income transfers from mRD and any additional resources such as service charges paid to IDA net of administrative expenses and residual resources from past replenishments) As can be seen in Table 2 RITO resources have been playing an increasing role in the funding of IDA RITO resources which funded 25 of IDA9 and IDA10 are expected to fund 48 of IDA 11 and the ITF

- 8 -

19 mRD Net Income Transfers Allocations of mRD net income are governed by a medium-term frameworks under which the first priority is assuring the adequacy of mRD reserves In the face of a declining trend in mRD net income and growing pressures to increase reserves due to a higher portfolio risk the amount of net income available for other uses-including transfers to IDA-is expected to decline sharply in FY98 The future levels of mRD net income and the amounts required for allocation to reserves are not certain Thus the amounts available for other uses cannot be determined in advance The mRDs Articles of Agreement require that the disposition of net income be authorized by its Board of Governors after such income has been earned and an amount has been allocated for reserves adequacy Therefore mRD cannot pledge transfers from future net income As a result expected contributions from IBRD during a replenishment and possible future contributions should be treated differently from donor pledges

Uses of RITO Resources

20 In addition to serving as the primary buffer against unexpected financial shocks RITO resources enable IDA to finance both new IDA credits through advance commitments and the Fifth Dimension Program

21 Under the Advance Commitment Scheme IDA commits RITO resources that are expected to become available in the coming years in advance of their actual receipt Because IDA credits disburse over several years there is a time lag between credit approval and cash requirements It is therefore possible to rely on IDA expected inflows to meet future disbursement obligations Reflows (which represent the largest component of IDAs expected inflows) and future investment income increase IDAs commitment authority through the Advance Commitment Scheme

22 The other use of RITO resources is the Fifth Dimension Program which was established to assist IDA countries that are no longer able to borrow on IBRD terms (ie IDA-only countries) but have outstanding mRD debt The facility allocates on an annual basis additional resources to IDA-only countries that meet specific requirements in proportion to a countrys interest payments on its mRD debt Only loans approved by the Executive Directors prior to the creation of the program (on September 23 1988) are covered Since Fifth Dimension credits are provided as a lump-sum supplement to adjustment credits they are fast-disbursing and they need to be financed by RITO resources that are available in cash or expected to become so within the coming year

8 Medium-Term Oudook and Policy on Annual Allocation of Net Income R90-193 dated September 211990 as revised in SecM90-14791 dated November 271990 and in R97-1751 datedJuly 181997 and R97-1752 dated July 301997

~9-

Table 3 Uses ofRITO Resource (USD million excel SDR million as noted)

AsW1 tmialtd lD6ll mall 112613 lIol~

~ fr22 ill m2 fYoo EYQ FY02 fY03 FY04 ll2l FY06 FY07 FYOS

IUTO Position I (1IltIillaing r bull 11 hlr 3687 4410 4650 4210 3699 3789 3295 3332 2331 1338 1432 82S

Addi_ Dotrio FY 2 Repaymentgt ai 615 679 828 971 1171 1376 1572 1759 1963 2163 2332 2558

]nvatmcnt income 275 251 241 217 205 197 185 165 120 98 87 64

4 mIlD Net Income Transfer bl 600 300 bl bI hi hi 300 900

5 NO offect of punbue of IDA cndi1S by HIPC cJ 134 25 28 207 228 middot29 middot32 middot36 -42 -45 -48

6 ou inOows d 297 232 0 0 486 0 602 0 0 0 0 0

1 TouIlal1ow 1181 1596 1094 1216 2069 1801 2630 1892 2047 3119 2374 2574

tI Dotrill FY 8 lgtisbwsenenlS on prior IJenihm IIId

contribution to administrative expenses e 0 131 0 0 0 0 0 0 0 0 0 0

9 Disbursements on advance commitments and commitmerus Ipinst net income DIIlSfm 910 1112 1450 1608 1938 2261 2513 2879 lO32 l025 2918 2964

10 DisbursemcnlS on Fifth DimenslOft CRdils 154 113 54 59 41 28 20 14 8 0 0 0

II TouIOcn- 1064 1356 1534 1727 1979 2295 2593 2893 3040 3025 2918 2964

~ 123 240 -440 middot511 90 -494 37 middot1001 99l 94 6Q4 middot390

RITOP 12 (Ead orfiocal Year) 4410 4650 4210 3699 3789 3295 3332 2331 1338 1432 828 438

Mcmoicems _ b)l1UTO RaouICD

3 Advance CommiD1 (SDR) 783 944 2423f1 1950 1950 1950 2200 2200 2200 2200 2200 2200 14 IuIvance Commi1m u (USD) 1096 1274 3211 2633 2633 2633 2970 2910 2970 2970 2970 2970 IS Fifth Dim i1m Crediu (SDR) 110 54 62 44 30 21 IS 10 6 0 0 0 16 Fifth Di ion Credits (USD) 154 III 54 59 41 28 20 14 8 0 0 0

Noe SDRIUSD excIwIgc tale - 13 5 Note DOIalla may _ add up due rounding

aI no IlOl iIgtdude npaymoms from CXlUIlIrics in w IIIIIIIS 1gt1 The fY91 and FY9S II1II_ IOIISIII rnnsf of 5300 million per year from mIlD lid m- IIId 5300 million from ourpl

RdlectiJIg theundenandins_ed for IDAll1II mllDrnnsferofS3OO million has been for fY99(to benrzived in rY03) Projections IigtltfY00-02 n working assumplicm ofllle COIIWruaUonofmllD income IrII1Jf ofSloo million per year The mIlD can only provide WA the _ that this is armpatible with its own Ii--=ial and prudcnIial i_ and subjoct the I4PfOVII of the Board of Governors lBRDs i_ is dedininS and fuIUrc -e to WA may not be feasible Fuurno lid income pngtSpetlI are under intenJe _ and will be discussed in dclail by 1bc EDs ia tile MIl fuIUrc Rcoeipt ofthesc rnnsf is in fY06

clllepnscats projected net off on IDA r cial flows fnlat HIPC ~ spccif ly the offcct of IDA fiulding HIPC during the wun period and tile porrdIae of IDA cndits by the HIPC Trust FWIlt Thae -Id be ~ IS vcy prdimiDary ati-ince the IICtIIaI HIPC will depaId on Board daiIion ooraming fuIUrc eligibility of coumria Iigtlt HIPC dot relief the _ or deb relief to be poovided Oft IDA debt IIId the ftlCCbaniam for 1bc debt relief in _h

d The fY97 amoun_1S adjus on RITO The fY9S amoun projected SlltJI in IDA 7 FYOI projected surplus in IDAS and fY01 projected ourpluo in IDA9

d Projected disbunemcnts in IDA 7 in fY98 Proie=- _ income fnlat ce ciwBeo equals admiaisnlive Service ciwBeo fnlat CXlUIlIrics in --=noaI eluded

fllnltludes RITO __ ofSDRI7 billionCllried fnlat IDAIO cxcIuda aporcud CIIITY ofRITO ofSDRII billion

Management of RITa Resources

23 The Executive Directors review and approve a three-year framework for RITa resources for the replenishment period9 They also review and approve on an annual basis the use of RITa resources through the Advance Commitment Scheme and the Fifth Dimension Program10 Projected IBRD interest payments eligible for coverage under the Fifth Dimension Program are fast declining and will become negligible (less than USD 10 million) by FY05 By far the largest part of RITa resources is used through the Advance Commitment Scheme

9

10

IDAll Non-Donor Resource Framework FY97-99 IDAlR96-143 dated July 18 1996

Use of IDAs RITO Resources - FY98 IDAlR97-84 dated July 29 1997

- 8 -

19 mRD Net Income Transfers Allocations of mRD net income are governed by a medium-term frameworks under which the first priority is assuring the adequacy of mRD reserves In the face of a declining trend in mRD net income and growing pressures to increase reserves due to a higher portfolio risk the amount of net income available for other uses-including transfers to IDA-is expected to decline sharply in FY98 The future levels of mRD net income and the amounts required for allocation to reserves are not certain Thus the amounts available for other uses cannot be determined in advance The mRDs Articles of Agreement require that the disposition of net income be authorized by its Board of Governors after such income has been earned and an amount has been allocated for reserves adequacy Therefore mRD cannot pledge transfers from future net income As a result expected contributions from IBRD during a replenishment and possible future contributions should be treated differently from donor pledges

Uses of RITO Resources

20 In addition to serving as the primary buffer against unexpected financial shocks RITO resources enable IDA to finance both new IDA credits through advance commitments and the Fifth Dimension Program

21 Under the Advance Commitment Scheme IDA commits RITO resources that are expected to become available in the coming years in advance of their actual receipt Because IDA credits disburse over several years there is a time lag between credit approval and cash requirements It is therefore possible to rely on IDA expected inflows to meet future disbursement obligations Reflows (which represent the largest component of IDAs expected inflows) and future investment income increase IDAs commitment authority through the Advance Commitment Scheme

22 The other use of RITO resources is the Fifth Dimension Program which was established to assist IDA countries that are no longer able to borrow on IBRD terms (ie IDA-only countries) but have outstanding mRD debt The facility allocates on an annual basis additional resources to IDA-only countries that meet specific requirements in proportion to a countrys interest payments on its mRD debt Only loans approved by the Executive Directors prior to the creation of the program (on September 23 1988) are covered Since Fifth Dimension credits are provided as a lump-sum supplement to adjustment credits they are fast-disbursing and they need to be financed by RITO resources that are available in cash or expected to become so within the coming year

8 Medium-Term Oudook and Policy on Annual Allocation of Net Income R90-193 dated September 211990 as revised in SecM90-14791 dated November 271990 and in R97-1751 datedJuly 181997 and R97-1752 dated July 301997

~9-

Table 3 Uses ofRITO Resource (USD million excel SDR million as noted)

AsW1 tmialtd lD6ll mall 112613 lIol~

~ fr22 ill m2 fYoo EYQ FY02 fY03 FY04 ll2l FY06 FY07 FYOS

IUTO Position I (1IltIillaing r bull 11 hlr 3687 4410 4650 4210 3699 3789 3295 3332 2331 1338 1432 82S

Addi_ Dotrio FY 2 Repaymentgt ai 615 679 828 971 1171 1376 1572 1759 1963 2163 2332 2558

]nvatmcnt income 275 251 241 217 205 197 185 165 120 98 87 64

4 mIlD Net Income Transfer bl 600 300 bl bI hi hi 300 900

5 NO offect of punbue of IDA cndi1S by HIPC cJ 134 25 28 207 228 middot29 middot32 middot36 -42 -45 -48

6 ou inOows d 297 232 0 0 486 0 602 0 0 0 0 0

1 TouIlal1ow 1181 1596 1094 1216 2069 1801 2630 1892 2047 3119 2374 2574

tI Dotrill FY 8 lgtisbwsenenlS on prior IJenihm IIId

contribution to administrative expenses e 0 131 0 0 0 0 0 0 0 0 0 0

9 Disbursements on advance commitments and commitmerus Ipinst net income DIIlSfm 910 1112 1450 1608 1938 2261 2513 2879 lO32 l025 2918 2964

10 DisbursemcnlS on Fifth DimenslOft CRdils 154 113 54 59 41 28 20 14 8 0 0 0

II TouIOcn- 1064 1356 1534 1727 1979 2295 2593 2893 3040 3025 2918 2964

~ 123 240 -440 middot511 90 -494 37 middot1001 99l 94 6Q4 middot390

RITOP 12 (Ead orfiocal Year) 4410 4650 4210 3699 3789 3295 3332 2331 1338 1432 828 438

Mcmoicems _ b)l1UTO RaouICD

3 Advance CommiD1 (SDR) 783 944 2423f1 1950 1950 1950 2200 2200 2200 2200 2200 2200 14 IuIvance Commi1m u (USD) 1096 1274 3211 2633 2633 2633 2970 2910 2970 2970 2970 2970 IS Fifth Dim i1m Crediu (SDR) 110 54 62 44 30 21 IS 10 6 0 0 0 16 Fifth Di ion Credits (USD) 154 III 54 59 41 28 20 14 8 0 0 0

Noe SDRIUSD excIwIgc tale - 13 5 Note DOIalla may _ add up due rounding

aI no IlOl iIgtdude npaymoms from CXlUIlIrics in w IIIIIIIS 1gt1 The fY91 and FY9S II1II_ IOIISIII rnnsf of 5300 million per year from mIlD lid m- IIId 5300 million from ourpl

RdlectiJIg theundenandins_ed for IDAll1II mllDrnnsferofS3OO million has been for fY99(to benrzived in rY03) Projections IigtltfY00-02 n working assumplicm ofllle COIIWruaUonofmllD income IrII1Jf ofSloo million per year The mIlD can only provide WA the _ that this is armpatible with its own Ii--=ial and prudcnIial i_ and subjoct the I4PfOVII of the Board of Governors lBRDs i_ is dedininS and fuIUrc -e to WA may not be feasible Fuurno lid income pngtSpetlI are under intenJe _ and will be discussed in dclail by 1bc EDs ia tile MIl fuIUrc Rcoeipt ofthesc rnnsf is in fY06

clllepnscats projected net off on IDA r cial flows fnlat HIPC ~ spccif ly the offcct of IDA fiulding HIPC during the wun period and tile porrdIae of IDA cndits by the HIPC Trust FWIlt Thae -Id be ~ IS vcy prdimiDary ati-ince the IICtIIaI HIPC will depaId on Board daiIion ooraming fuIUrc eligibility of coumria Iigtlt HIPC dot relief the _ or deb relief to be poovided Oft IDA debt IIId the ftlCCbaniam for 1bc debt relief in _h

d The fY97 amoun_1S adjus on RITO The fY9S amoun projected SlltJI in IDA 7 FYOI projected surplus in IDAS and fY01 projected ourpluo in IDA9

d Projected disbunemcnts in IDA 7 in fY98 Proie=- _ income fnlat ce ciwBeo equals admiaisnlive Service ciwBeo fnlat CXlUIlIrics in --=noaI eluded

fllnltludes RITO __ ofSDRI7 billionCllried fnlat IDAIO cxcIuda aporcud CIIITY ofRITO ofSDRII billion

Management of RITa Resources

23 The Executive Directors review and approve a three-year framework for RITa resources for the replenishment period9 They also review and approve on an annual basis the use of RITa resources through the Advance Commitment Scheme and the Fifth Dimension Program10 Projected IBRD interest payments eligible for coverage under the Fifth Dimension Program are fast declining and will become negligible (less than USD 10 million) by FY05 By far the largest part of RITa resources is used through the Advance Commitment Scheme

9

10

IDAll Non-Donor Resource Framework FY97-99 IDAlR96-143 dated July 18 1996

Use of IDAs RITO Resources - FY98 IDAlR97-84 dated July 29 1997

~9-

Table 3 Uses ofRITO Resource (USD million excel SDR million as noted)

AsW1 tmialtd lD6ll mall 112613 lIol~

~ fr22 ill m2 fYoo EYQ FY02 fY03 FY04 ll2l FY06 FY07 FYOS

IUTO Position I (1IltIillaing r bull 11 hlr 3687 4410 4650 4210 3699 3789 3295 3332 2331 1338 1432 82S

Addi_ Dotrio FY 2 Repaymentgt ai 615 679 828 971 1171 1376 1572 1759 1963 2163 2332 2558

]nvatmcnt income 275 251 241 217 205 197 185 165 120 98 87 64

4 mIlD Net Income Transfer bl 600 300 bl bI hi hi 300 900

5 NO offect of punbue of IDA cndi1S by HIPC cJ 134 25 28 207 228 middot29 middot32 middot36 -42 -45 -48

6 ou inOows d 297 232 0 0 486 0 602 0 0 0 0 0

1 TouIlal1ow 1181 1596 1094 1216 2069 1801 2630 1892 2047 3119 2374 2574

tI Dotrill FY 8 lgtisbwsenenlS on prior IJenihm IIId

contribution to administrative expenses e 0 131 0 0 0 0 0 0 0 0 0 0

9 Disbursements on advance commitments and commitmerus Ipinst net income DIIlSfm 910 1112 1450 1608 1938 2261 2513 2879 lO32 l025 2918 2964

10 DisbursemcnlS on Fifth DimenslOft CRdils 154 113 54 59 41 28 20 14 8 0 0 0

II TouIOcn- 1064 1356 1534 1727 1979 2295 2593 2893 3040 3025 2918 2964

~ 123 240 -440 middot511 90 -494 37 middot1001 99l 94 6Q4 middot390

RITOP 12 (Ead orfiocal Year) 4410 4650 4210 3699 3789 3295 3332 2331 1338 1432 828 438

Mcmoicems _ b)l1UTO RaouICD

3 Advance CommiD1 (SDR) 783 944 2423f1 1950 1950 1950 2200 2200 2200 2200 2200 2200 14 IuIvance Commi1m u (USD) 1096 1274 3211 2633 2633 2633 2970 2910 2970 2970 2970 2970 IS Fifth Dim i1m Crediu (SDR) 110 54 62 44 30 21 IS 10 6 0 0 0 16 Fifth Di ion Credits (USD) 154 III 54 59 41 28 20 14 8 0 0 0

Noe SDRIUSD excIwIgc tale - 13 5 Note DOIalla may _ add up due rounding

aI no IlOl iIgtdude npaymoms from CXlUIlIrics in w IIIIIIIS 1gt1 The fY91 and FY9S II1II_ IOIISIII rnnsf of 5300 million per year from mIlD lid m- IIId 5300 million from ourpl

RdlectiJIg theundenandins_ed for IDAll1II mllDrnnsferofS3OO million has been for fY99(to benrzived in rY03) Projections IigtltfY00-02 n working assumplicm ofllle COIIWruaUonofmllD income IrII1Jf ofSloo million per year The mIlD can only provide WA the _ that this is armpatible with its own Ii--=ial and prudcnIial i_ and subjoct the I4PfOVII of the Board of Governors lBRDs i_ is dedininS and fuIUrc -e to WA may not be feasible Fuurno lid income pngtSpetlI are under intenJe _ and will be discussed in dclail by 1bc EDs ia tile MIl fuIUrc Rcoeipt ofthesc rnnsf is in fY06

clllepnscats projected net off on IDA r cial flows fnlat HIPC ~ spccif ly the offcct of IDA fiulding HIPC during the wun period and tile porrdIae of IDA cndits by the HIPC Trust FWIlt Thae -Id be ~ IS vcy prdimiDary ati-ince the IICtIIaI HIPC will depaId on Board daiIion ooraming fuIUrc eligibility of coumria Iigtlt HIPC dot relief the _ or deb relief to be poovided Oft IDA debt IIId the ftlCCbaniam for 1bc debt relief in _h

d The fY97 amoun_1S adjus on RITO The fY9S amoun projected SlltJI in IDA 7 FYOI projected surplus in IDAS and fY01 projected ourpluo in IDA9

d Projected disbunemcnts in IDA 7 in fY98 Proie=- _ income fnlat ce ciwBeo equals admiaisnlive Service ciwBeo fnlat CXlUIlIrics in --=noaI eluded

fllnltludes RITO __ ofSDRI7 billionCllried fnlat IDAIO cxcIuda aporcud CIIITY ofRITO ofSDRII billion

Management of RITa Resources

23 The Executive Directors review and approve a three-year framework for RITa resources for the replenishment period9 They also review and approve on an annual basis the use of RITa resources through the Advance Commitment Scheme and the Fifth Dimension Program10 Projected IBRD interest payments eligible for coverage under the Fifth Dimension Program are fast declining and will become negligible (less than USD 10 million) by FY05 By far the largest part of RITa resources is used through the Advance Commitment Scheme

9

10

IDAll Non-Donor Resource Framework FY97-99 IDAlR96-143 dated July 18 1996

Use of IDAs RITO Resources - FY98 IDAlR97-84 dated July 29 1997

- 10-

24 As IDA management plans the use of RITO resources in the coming years it starts by focusing on the expected inflows and outflows Each time the levels of advance commitments and Fifth Dimension credits for the coming years are revised the patterns of inflows and outflows change and the balance of resources on hand changes The selection of the appropriate levels of commitments is done iteratively by choosing the streams of commitment levels that best meet the operational resource requirements while maintaining an adequate precautionary balance

25 To ensure that commitment levels based on RITO resources remain within the limits of financial prudence several key assumptions are used in projecting future resource availability The projections exclude principal repayments and service charge payments from IDA borrowers in non-accrual status and assume that arrears will not increase II They also assume no transfers to IDA from IBRD net income beyond those provided for indicatively in the IDAll agreement Since IDAs RITO resource position is reviewed annually actual commitments of such funds can be adjusted in response to unforeseen changes in the RITO resource position-including in the case of a slower realization of reflows or that of a faster disbursement of credits

Availability of RITa Resources During the IDA12 Period and Beyond

26 The framework explained above can be used to determine IDAs capacity to commit RITO resources during the IDA12 period and beyond The impact of the HIPC Debt Initiative on RITO resources which is fairly small has been fully taken into account U The projections shown in Table 3 assume the following

bull

bull

bull

11

12

Advance commitments of SDR 3367 million for the remainder of IDAll (FY98 and FY99) consistent with the three-year framework approved by the Executive Directors for the IDAll period

Annual Fifth Dimension credits of SDR 146 million for the remainder of IDAll covering 95 of IBRD interest due on eligible loans based on the cut-off date of September 23 1988 and including the 19 countries currently eligible

As noted earlier because IBRD net income transfers are subject to the residual availability of net income after the necessary allocation to ffiRDs reserves and in any case depend on decisions made by the Board of Governors of IBRD no net income transfers can be counted upon in advance of actual annual allocations For the purpose of this exercise however it is assumed that ffiRD would continue to

As of December 31 1997 six IDA countries (Afghanistan Congo DR Congo Liberia Somalia

and Sudan) were in non-accrual status with overdues to IDA Disbursed and outstanding IDA credits to these countries amount to USD 3171 million (which represents less than 5 of IDAs portfolio)

An analysis of the impact of the HlPe Debt Initiative on RITO resources is provided in Annex 2

-11-

contribute to IDAs commitment authority at the same level-USD 300 million per year-during the course ofIDA12 and IDAD as it did in FY97 out of FY96 net income and in FY98 out of FY97 net income

bull No inflows (principal repayments and service charge payments) from countries currently in non-accrual status

bull No assumption is made concerning the size of replenishments after IDAll13

27 The commitment authority for IDA12 is arrived at through an iterative process by ensuring subject to the assumptions set out immediately above that the level of available RITa resources remains adequate to meet all cash obligations and contingencies The attached table also shows the various inflows and outflows as well as the balance of resources on hand As can be seen from the table the RITa cash balance was about USD 4410 million at the beginning of FY98 Under the projected use of RITa resources the cash balance will start declining progressively at the beginning of IDA12-to reach USD 828 million by the end of IDA14 (FY08)14 The steady growth in repayments from USD 615 million in FY97 to USD 2558 million in FY08 will make it possible to increase advance commitments substantially in the next replenishment-from SDR 415 billion in IDAll to SDR 585 billion in IDA12-and beyond-SDR 66 billion in IDAB and IDA14

28 Because advance commitments do not immediately affect IDAs cash balances it is possible to make these credit commitments without having the required resources on hand but in anticipation of their availability when needed In every year as can be seen from the table advance commitments are substantially higher than reflows15

29 For the last few years IDA has had relatively large balances of RITa resources on hand RITa liquidity has accumulated partly because IDA cannot assume the level of IBRD net income that might be transferred and accordingly cannot commit such resources before they are received Thus whenever transfers are made they immediately increase the level of RITa liquidity which will decline in due course as additional credits financed by IBRD net income transfers disburse In recent years this lumpiness has been accentuated by cash transfers from IBRD (USD 1 billion during IDAI0) and the transfer to IDA in FY95 of all outstanding mRD net income

13

14

15

Future replenishments have only a marginal effect on the RlTO resource projections for the next decade primarily through the investment income on the donor liquidity on hand Principal repayments on future replenishments fall outside the planning horizon shown in the table

Based on current projections RlTO liquidity will continue to decline to reach its lowest levelshyUSD 328 million equivalent to S weeks of disbursements-at the beginning of IDA1S (FY09)

As previously noted this presupposes that principal repayments will actually take place as scheduled Should arrears increase advance commitments authority would then be cunailed accordingly

-11-

contribute to IDAs commitment authority at the same level-USD 300 million per year-during the course ofIDA12 and IDAD as it did in FY97 out of FY96 net income and in FY98 out of FY97 net income

bull No inflows (principal repayments and service charge payments) from countries currently in non-accrual status

bull No assumption is made concerning the size of replenishments after IDAll13

27 The commitment authority for IDA12 is arrived at through an iterative process by ensuring subject to the assumptions set out immediately above that the level of available RITa resources remains adequate to meet all cash obligations and contingencies The attached table also shows the various inflows and outflows as well as the balance of resources on hand As can be seen from the table the RITa cash balance was about USD 4410 million at the beginning of FY98 Under the projected use of RITa resources the cash balance will start declining progressively at the beginning of IDA12-to reach USD 828 million by the end of IDA14 (FY08)14 The steady growth in repayments from USD 615 million in FY97 to USD 2558 million in FY08 will make it possible to increase advance commitments substantially in the next replenishment-from SDR 415 billion in IDAll to SDR 585 billion in IDA12-and beyond-SDR 66 billion in IDAB and IDA14

28 Because advance commitments do not immediately affect IDAs cash balances it is possible to make these credit commitments without having the required resources on hand but in anticipation of their availability when needed In every year as can be seen from the table advance commitments are substantially higher than reflows15

29 For the last few years IDA has had relatively large balances of RITa resources on hand RITa liquidity has accumulated partly because IDA cannot assume the level of IBRD net income that might be transferred and accordingly cannot commit such resources before they are received Thus whenever transfers are made they immediately increase the level of RITa liquidity which will decline in due course as additional credits financed by IBRD net income transfers disburse In recent years this lumpiness has been accentuated by cash transfers from IBRD (USD 1 billion during IDAI0) and the transfer to IDA in FY95 of all outstanding mRD net income

13

14

15

Future replenishments have only a marginal effect on the RlTO resource projections for the next decade primarily through the investment income on the donor liquidity on hand Principal repayments on future replenishments fall outside the planning horizon shown in the table

Based on current projections RlTO liquidity will continue to decline to reach its lowest levelshyUSD 328 million equivalent to S weeks of disbursements-at the beginning of IDA1S (FY09)

As previously noted this presupposes that principal repayments will actually take place as scheduled Should arrears increase advance commitments authority would then be cunailed accordingly

- 12-

allocations from prior years (USD 11 billion) In any event RITO liquidity consists to a large extent of funds that are already committed and awaiting disbursement IDAs use of its RITO liquidity to manage its currency risk exposure is explained in Section III

30 Risks Associated with the Advance Commitment Scheme The underlying assumption of the Advance Commitment Scheme is that the full value of reflows will be collected from all borrowers except those in arrears on time Advance commitment capacity is reviewed annually and can be scaled back as necessary Nonetheless given economic and political uncertainties an element of credit risk could be considered in assessing the expected value of reflows against which IDA can make advance commitments IDA does not currently assign a probability of timely repayment to individual borrowers However IDAs dependence on reflows to finance credits will increase from 12 in IDAll (FY97-99) to 49 in IDAIS (FY09-11) Therefore this will be a greater risk for IDA in the future

31 A review of IDAs experience with arrears and the analysis of individual cases show that arrears generally result from a period of civil strife Six IDA countries (Afghanistan Congo DR Congo Liberia Somalia and Sudan) were in non-accrual status with overdues to IDA as of December 31 1997 Disbursed and outstanding IDA credits to these countries amount to USD 3171 million (which represents less than 5 of IDAs portfolio) Since they receive no new credits while in non-accrual status their being in non-accrual status actually triggers an increase of IDAs commitment authority compared to what it would be if they were current on payments and receiving performance-based IDA allocations Once they reactivate arrears clearance to IDA is expected to be resolved rapidly at which point each of these countries will seek new IDA commitments

32 With regard to future contingencies Table 4 below shows the breakdown of reflows among different categories of borrowers More than 85 of reflows come from graduates blend countries and IDA-only countries with a high level of performance Even a high incidence of non-accrual in countries that are below IDAs performance median will not appreciably affect RITO resource availability at this time At this stage we believe that it continues to be prudent to determine the level of RITO resource commitment annually without applying a specific discount to the stock of receivables Nonetheless we intend to keep the situation under close review as part of the annual review process focusing on the use of RITO resources

Table 4 Reflows from Outstanding Credits (in USD million) (excluding countries in non-accrual status)

Period IDA Graduates IDA-only IDA-only and Blends Countries w Countries w

Above Median Below Median Performance Performance

IDA12 1910 1076 514 IDA 13 2741 1720 790 IDA14 3540 2410 1068 IDA15 4061 2897 1288 IDA16 4538 3355 1467 IDA17 5010 3773 1645 IDA18 5280 4060 1743

Total

3500 5253 7018 8246 9360 10427 11082

( Actual reflows will depend on the size of IDA 12 and future replenishments)

Can RITO Resources Be Increased by Changing IDA Terms

33 IDA Deputies have asked about the feasibility of hardening the terms of IDA lending (1DA terms) The hardening of IDA terms could be done ina variety of ways as discussed below The impact on the flow of RITO resources would however remain limited in the medium term under any practical option

34 Accelerated Repayments In August 1996 the Executive Directors adopted a revised accelerated repayment provision for IDA credits Under this new provision the semi-annual repayments on eligible IDA credits16 would be doubled when a country exceeded the operational (rather than historical) IDA eligibility cut-off for 3 consecutive years17 This provision was introduced in recognition that some of todays poor countries could quickly rebound economically and be able to repay IDA more rapidly The potential impact on IDA receipts was a secondary consideration in this provision The impact of accelerated repayments on IDA reflows over the short to medium term is expected to be minimal because (i) the provision applies only to new IDA credits negotiated after August 1996 and (ii) only a few IDA borrowers are expected to meet the accelerated repayment conditions over the next 10 years These include Bolivia China Egypt18 and a number of relatively small ECA countries where the amount of IDA lending involved would also be smalL This provision will have no impact on IDA repayments during IDA12 In IDA13 additional IDA receipts as a

16

17

18

Credits negotiated after August 1996

IDAlR96-145 July 231996 Modification to Accelerated Repayment Terms of IDA Credits

China and Egypt will both graduate from IDA at the end of FY99 The total volume of lending to these two countries that will be affected by the amendment will be less than SDR1 billion

Table 4 Reflows from Outstanding Credits (in USD million) (excluding countries in non-accrual status)

Period IDA Graduates IDA-only IDA-only and Blends Countries w Countries w

Above Median Below Median Performance Performance

IDA12 1910 1076 514 IDA 13 2741 1720 790 IDA14 3540 2410 1068 IDA15 4061 2897 1288 IDA16 4538 3355 1467 IDA17 5010 3773 1645 IDA18 5280 4060 1743

Total

3500 5253 7018 8246 9360 10427 11082

( Actual reflows will depend on the size of IDA 12 and future replenishments)

Can RITO Resources Be Increased by Changing IDA Terms

33 IDA Deputies have asked about the feasibility of hardening the terms of IDA lending (1DA terms) The hardening of IDA terms could be done ina variety of ways as discussed below The impact on the flow of RITO resources would however remain limited in the medium term under any practical option

34 Accelerated Repayments In August 1996 the Executive Directors adopted a revised accelerated repayment provision for IDA credits Under this new provision the semi-annual repayments on eligible IDA credits16 would be doubled when a country exceeded the operational (rather than historical) IDA eligibility cut-off for 3 consecutive years17 This provision was introduced in recognition that some of todays poor countries could quickly rebound economically and be able to repay IDA more rapidly The potential impact on IDA receipts was a secondary consideration in this provision The impact of accelerated repayments on IDA reflows over the short to medium term is expected to be minimal because (i) the provision applies only to new IDA credits negotiated after August 1996 and (ii) only a few IDA borrowers are expected to meet the accelerated repayment conditions over the next 10 years These include Bolivia China Egypt18 and a number of relatively small ECA countries where the amount of IDA lending involved would also be smalL This provision will have no impact on IDA repayments during IDA12 In IDA13 additional IDA receipts as a

16

17

18

Credits negotiated after August 1996

IDAlR96-145 July 231996 Modification to Accelerated Repayment Terms of IDA Credits

China and Egypt will both graduate from IDA at the end of FY99 The total volume of lending to these two countries that will be affected by the amendment will be less than SDR1 billion

- 14-

result of this provision could total SDR 40 to 50 million a year It would most likely remain around that level until IDAlS at which time the net addition would decline

35 Harder Terms for Blends Harder terms on new lending to blend countries could take the form of either charging interest on credits or shortening their amortization schedule The rationale for such hardening of terms would be based on the recognition that blend countries can afford to pay more than IDA-only countries The impact of such changes on RITO resources would be a function not only of the magnitude of the specific changes but also of the level of future IDA lending to blend countries The base case lending profile that has been developed for this analysis assumes that lending to current blend countries would decline from a three-year level of SDR 32 billion in IDA12 and SDR 28 billion in IDA13 to SDR 13 billion in IDA14 and only a nominal amount in IDA1619 The result of such a drop in IDA lending to current blend countries in the outer years is that the long-term impact of a hardening of IDA terms focusing on blends would be smalL Based on these assumptions the results of hardening IDA terms for blend countries are as follows

bull The addition of an interest charge on IDA credits to blend countries could only apply to new credits It would therefore increase RITO resources only gradually and with the progressive decline in IDA lending to current blend countries would eventually plateau For example if a 3 interest charge were applied beginning at the start of IDA12 it would generate additional receipts of approximately SDR 170 million during IDA12 This would increase to about SDR 460 million in IDA13 SDR 760 million in IDA14 and plateau at a level of around SDR 950 million in IDAlS and IDA 16

bull A change in the amortization maturitygrace schedule of IDA credits to blend countries would have no effect on IDAs fmances in the short term For example with a change in the amortization schedule from 35-year maturitylO-year grace period to 25-year maturity5-year grace period repayments would not increase before the last year of IDA 13 and would increase only gradually thereafter RITO resources would increase by SDR 480 million in IDA14 and would reach a peak of SDR 810 million in IDA15 before declining in IDA16 A change in the amortization schedule would not generate additional resources but would instead result in a front loading of reflows in IDA15 and IDA16 of about SDR 800 million These reflows would otherwise have been received at a later date Of

19

course front loading these repayments entails a corresponding decrease in reflows for the later replenishments

While it is possible that a number of currently IDA-only countries could move to blend status over time no specific assumptions were made concerning either the countries which might follow this path or the amount of lending that would be made to such countries since this would hinge on prevailing creditwonhiness conditions in these countries Adding new blend countries in the medium term however would only affect these results in the long-tenn

- 15-

36 Commitment Fee IDA credits carry a contractual commitment fee of zero to 05 applicable to the undisbursed balance of the credit This commitment fee is set annually in such a way that the total amount of credit charges collected by IDAshyincluding service charges and commitment fees-matches its administrative expenses over time Since 1989 the commitment fee has been set by the Executive Directors at zero because IDAs capacity to cover its administrative costs from service charges alone had grown Service charges fully covered administrative expenses by FY96 and are expected to continue to do so Given current and possible future levels of undisbursed balances the reintroduction of a commitment fee of 05 on all IDA credits would generate approximately SDR 75 million per year during IDA12 and beyond Levying a commitment fee on undisbursed balances would not materially improve the implementation of IDA projects This latter objective is achieved through the measures discussed in the IDA Portfolio Review paper20

37 Table 5 summarizes the potential impact on RITO resources of the various options for a hardening of IDA terms for blend countries as discussed above Taken individually these measures would have a very small impact during the course of the next two to three replenishments If these measures were combined the impact on RITO resources would be much larger in post IDA13 replenishments Their combined impact on terms would result in a substantial reduction of the grant element attached to IDA credits-to about a third of its current level

Table S Additional ReceiQt5 from a Hardening of IDA Terms (SDR million)

IDA12 IDA13 IDA14 IDA15 IDA16 (FY00-(2) (FY03-05) (FY06-08) (FY09-11) (FY12-14)

Harder IDA Terms for Blend Countries Charge 3 interest on new lending 170 460 760 930 980

Change amortization (maturitygrace) schedule 0 50 480 810 770 from 3S-yearIO-year to 2S-yearS-year I

Combine a 3 interest charge with a change in the amortization schedule to 2S-yearS-year f 170 515 1220 1720 1720

Harder IDA Terms for all IDA Borrowers 220 220 220 220 220 Reintroduce 05 commitment fee

aI IDA lending to blend countries is assumed to be SDR 32 billion (IDAI2) SDR 28 billion (IDA13) SDR 13 billion (IDAI4) SDR 01 billion (IDAI5)

b Not additional resources but a front loading of the timing of receipts q Not a straight addition of the impacts of the two changes under consideration since a change in the amortization schedule affects the outstandine balances to which the interest charee would aoolv

20 This paper was discussed at the February 1998 meeting of the IDA Deputies in Paris

In Currency and Liquidity Management

38 As noted earlier IDA manages its liquid assets (in terms of currency composition and investment objectives) in order to mitigate the risks it faces as a result of the impact of exchange rate fluctuations on donor resources and in line with expected disbursement needs on its credits As shown below most of IDAs liquidity is derived from RITO resources and its utilization over time is built into the determination of the level of advance commitments that IDA can undertake

Composition of IDAs Liquidity

39 IDAs liquidity is held in three separate portfolios including

bull The IDA-B portfolio (USD 46 billion) includes the RITO liquidity and the proceeds of the quarterly encashment of donor contributions that are immediately available for disbursement

bull The IDA-R portfolio (USD 28 billion) includes those donor resources that are not immediately available for disbursement Most of these resources consist of advance cash payments or encashments prior to IDAlO and the accelerated encashment portion of donor contributions under IDAlO The duration of the portfolio matches that of the schedule of expected cash transfers to the IDA-B portfolio and its currency composition matches that of the SDR

bull The ITF liquidity portfolio (USD 43 million) includes resources provided by donors to the ITF where some donors have agreed to a fIxed encashment schedule The duration of the portfolio matches that of its expected disbursements

Currency Management of IDAs RITO Liquiditfl

40 IDAs portfolio of receivables include both unencashed donor promissory notes and expected reflows The analysis of its currency composition indicates that it contains surpluses in certain currencies-and shortfalls in others-relative to the SDR basket This imbalance which is the source of IDAs currency risk implies a volatility in the SDR value of IDAs portfolio of receivables over time

21 As mentioned above the IDA-R and ITF liquidity portfolios are held in SDR In addition since the proceeds of quarterly encashments of donor notes are largerly disbursed within the quarter they are kept in SDR For the purpose of managing currency risk IDA uses therefore only its RITO liquidity

41 The objective of IDAs currency management strategy is to minimize the expected volatility in the SDR value of its asset portfolio (including both receivables and liquid assets) by managing the currency composition of its RITO liquidity and therefore to help protect the value of IDAs commitment authority (expressed in SDR) against adverse foreign exchange movements At a practical level IDA uses a proportional holding approach so as to bring the currency composition of all of IDAs resources closer to the SDR In this approach IDA holds its RITO liquidity in those SDR component currencies for which its receivables fall short of expected outflows in such a way that the shortfalls are reduced proportionately At the beginning of each quarter IDA reviews the currency composition of its overall resources determines currency surpluses andor shortfalls relative to the SDR basket and rebalances the currency composition of its RITO liquidity accordingly The result of the currency rebalancing exercise-before and after rebalancing-executed at the end of December 1997 is shown in Table 6

Table 6 Currency Rebalancing (as of December 311997)

Currencies SDR IDA Currency IDA Currency -- --composition resources sUpoundelus resources sUpoundelus

() before (shortfall after (shortfall) rebalancing before rebalancing after

() rebalancing () rebalancing () ()

USD 430 248 (182) 332 (98) DEM22 185 40 (145) 107 (78)

JPY 154 223 69 223 69 FRF 101 54 (47) 76 (25) GBP 130 43 (87) 84 (46)

Other 00 392 392 178 178 Total 1000 1000 00 1000 00

42 As is evident in Table 6 the extent to which the proportional holding currency management approach can reduce overall exposure is a function of the size of the RITO liquidity available the larger the RITO liquidity the greater the potential for reducing the currency risk exposure and hence reducing the volatility in the SDR value of IDAs overall resources We estimate that a 40 reduction in RITO liquidity would result in a 75 increase in the volatility of the SDR value of IDAs overall resources Over time as the level of RITO liquidity declines IDAs ability to reduce its currency risk exposure will decline concomitantly To some extent this will be offset because

22 For the purpose of managing currency risk we include Austrian shillings Belgian francs and Dutch guilders in a so-called DEM Group

- 18 -

future replenishments will rely to a larger extent on (SDR-denominated) reflows and to a lesser extent on new donor contributions (denominated in national currencies)

Liquidity Management

43 Liquid assets after allocation among currencies to reduce currency exposure are invested according to guidelines set out for managing IDAs investments The primary objective of IDAs liquidity management is to provide a ready source of liquidity when needed to make disbursements on development credits The secondary objective is to maximize the return on the investment of the liquidity portfolio subject to defined risk parameters These parameters in the form of loss limits and range of instruments eligible for investment are set out in the Investment Authoriry13 approved by the Executive Directors and in the Investment Guidelines approved by senior management24 In line with this authority and guidelines all of IDAs portfolios are held in investments selected so that they mature in time to meet IDAs cash needs

IV Should IDA Offer Currency Choice

44 A few IDA borrowers have made substantial progress in the field of sovereign debt management over the past few years If given an opportunity to exercise currency choice they would now most likely be in a position to ground their decision within a broad sovereign debt management framework In addition eligible HIPCs generally undergo a thorough process of debt data reconciliation-as the first step in the preparation of their Debt SUstainability Analysis-and should therefore be in a position to use better data as a basis for their sovereign debt management decisions At a time when ffiRD offers currency choice to its borrowers a question arises as to whether IDA should offer currency choice25 as well if its borrowers want it

45 For the purpose of illustration we compared the value today of a liability denominated in SDR-as a result of a credit extended during the course of IDA6 IDA7 IDA8 IDA9 IDAIO and the first half of IDAll respectively-with the value of a liability denominated in USD assuming that the borrower had been able to exercise a choice between SDR and USD at the time of these replenishments As one would expect gains and losses to IDA borrowers varied widely and were dependent on the time when commitments were made On the one hand as shown in Table 7 if an

23

24

Resolution No IDA 90-3 - General Investment Authorization

Revised IDA Investment Guidelines were approved by the Managing Director Finance amp Resource Mobilization on [date to be confirmed]

Given the imminence of the conversion of the national currencies of most European Union member states into the euro if IDA were to eventually offer currency choice to its borrowers it would probably do so in only three major currencies (USD JPY and the euro)

41 The objective of IDAs currency management strategy is to minimize the expected volatility in the SDR value of its asset portfolio (including both receivables and liquid assets) by managing the currency composition of its RITO liquidity and therefore to help protect the value of IDAs commitment authority (expressed in SDR) against adverse foreign exchange movements At a practical level IDA uses a proportional holding approach so as to bring the currency composition of all of IDAs resources closer to the SDR In this approach IDA holds its RITO liquidity in those SDR component currencies for which its receivables fall short of expected outflows in such a way that the shortfalls are reduced proportionately At the beginning of each quarter IDA reviews the currency composition of its overall resources determines currency surpluses andor shortfalls relative to the SDR basket and rebalances the currency composition of its RITO liquidity accordingly The result of the currency rebalancing exercise-before and after rebalancing-executed at the end of December 1997 is shown in Table 6

Table 6 Currency Rebalancing (as of December 311997)

Currencies SDR IDA Currency IDA Currency -- --composition resources sUpoundelus resources sUpoundelus

() before (shortfall after (shortfall) rebalancing before rebalancing after

() rebalancing () rebalancing () ()

USD 430 248 (182) 332 (98) DEM22 185 40 (145) 107 (78)

JPY 154 223 69 223 69 FRF 101 54 (47) 76 (25) GBP 130 43 (87) 84 (46)

Other 00 392 392 178 178 Total 1000 1000 00 1000 00

42 As is evident in Table 6 the extent to which the proportional holding currency management approach can reduce overall exposure is a function of the size of the RITO liquidity available the larger the RITO liquidity the greater the potential for reducing the currency risk exposure and hence reducing the volatility in the SDR value of IDAs overall resources We estimate that a 40 reduction in RITO liquidity would result in a 75 increase in the volatility of the SDR value of IDAs overall resources Over time as the level of RITO liquidity declines IDAs ability to reduce its currency risk exposure will decline concomitantly To some extent this will be offset because

22 For the purpose of managing currency risk we include Austrian shillings Belgian francs and Dutch guilders in a so-called DEM Group

- 18 -

future replenishments will rely to a larger extent on (SDR-denominated) reflows and to a lesser extent on new donor contributions (denominated in national currencies)

Liquidity Management

43 Liquid assets after allocation among currencies to reduce currency exposure are invested according to guidelines set out for managing IDAs investments The primary objective of IDAs liquidity management is to provide a ready source of liquidity when needed to make disbursements on development credits The secondary objective is to maximize the return on the investment of the liquidity portfolio subject to defined risk parameters These parameters in the form of loss limits and range of instruments eligible for investment are set out in the Investment Authoriry13 approved by the Executive Directors and in the Investment Guidelines approved by senior management24 In line with this authority and guidelines all of IDAs portfolios are held in investments selected so that they mature in time to meet IDAs cash needs

IV Should IDA Offer Currency Choice

44 A few IDA borrowers have made substantial progress in the field of sovereign debt management over the past few years If given an opportunity to exercise currency choice they would now most likely be in a position to ground their decision within a broad sovereign debt management framework In addition eligible HIPCs generally undergo a thorough process of debt data reconciliation-as the first step in the preparation of their Debt SUstainability Analysis-and should therefore be in a position to use better data as a basis for their sovereign debt management decisions At a time when ffiRD offers currency choice to its borrowers a question arises as to whether IDA should offer currency choice25 as well if its borrowers want it

45 For the purpose of illustration we compared the value today of a liability denominated in SDR-as a result of a credit extended during the course of IDA6 IDA7 IDA8 IDA9 IDAIO and the first half of IDAll respectively-with the value of a liability denominated in USD assuming that the borrower had been able to exercise a choice between SDR and USD at the time of these replenishments As one would expect gains and losses to IDA borrowers varied widely and were dependent on the time when commitments were made On the one hand as shown in Table 7 if an

23

24

Resolution No IDA 90-3 - General Investment Authorization

Revised IDA Investment Guidelines were approved by the Managing Director Finance amp Resource Mobilization on [date to be confirmed]

Given the imminence of the conversion of the national currencies of most European Union member states into the euro if IDA were to eventually offer currency choice to its borrowers it would probably do so in only three major currencies (USD JPY and the euro)

- 18 -

future replenishments will rely to a larger extent on (SDR-denominated) reflows and to a lesser extent on new donor contributions (denominated in national currencies)

Liquidity Management

43 Liquid assets after allocation among currencies to reduce currency exposure are invested according to guidelines set out for managing IDAs investments The primary objective of IDAs liquidity management is to provide a ready source of liquidity when needed to make disbursements on development credits The secondary objective is to maximize the return on the investment of the liquidity portfolio subject to defined risk parameters These parameters in the form of loss limits and range of instruments eligible for investment are set out in the Investment Authoriry13 approved by the Executive Directors and in the Investment Guidelines approved by senior management24 In line with this authority and guidelines all of IDAs portfolios are held in investments selected so that they mature in time to meet IDAs cash needs

IV Should IDA Offer Currency Choice

44 A few IDA borrowers have made substantial progress in the field of sovereign debt management over the past few years If given an opportunity to exercise currency choice they would now most likely be in a position to ground their decision within a broad sovereign debt management framework In addition eligible HIPCs generally undergo a thorough process of debt data reconciliation-as the first step in the preparation of their Debt SUstainability Analysis-and should therefore be in a position to use better data as a basis for their sovereign debt management decisions At a time when ffiRD offers currency choice to its borrowers a question arises as to whether IDA should offer currency choice25 as well if its borrowers want it

45 For the purpose of illustration we compared the value today of a liability denominated in SDR-as a result of a credit extended during the course of IDA6 IDA7 IDA8 IDA9 IDAIO and the first half of IDAll respectively-with the value of a liability denominated in USD assuming that the borrower had been able to exercise a choice between SDR and USD at the time of these replenishments As one would expect gains and losses to IDA borrowers varied widely and were dependent on the time when commitments were made On the one hand as shown in Table 7 if an

23

24

Resolution No IDA 90-3 - General Investment Authorization

Revised IDA Investment Guidelines were approved by the Managing Director Finance amp Resource Mobilization on [date to be confirmed]

Given the imminence of the conversion of the national currencies of most European Union member states into the euro if IDA were to eventually offer currency choice to its borrowers it would probably do so in only three major currencies (USD JPY and the euro)

- 19-

IDA country had been able to borrow in USD instead of SDR during the course of IDA6 the value of its liability would be 24 lower than it actually is today On the other hand if an IDA country had borrowed in USD instead of SDR during the course ofIDAlO the value of its liability would be 6 higher than it actually is today

Table 7 Comparison of the value today of an IDA borrowers SDR-denominated liability with the value of a USD-denominated liability assuming that

the borrower had been able to exercise a choice between SDR and USD

USDal

IDA6 (FY81-FY84) c 10971 Currentb 13652

Difference (02681)

IDA 7 (FY85-FY87) 11098 Currentbl 13652

Difference (02554)

IDA8 (FY88-FY90) 13127 Current bl 13652

Difference (00525)

IDA9 (FY91-FY93) 13919 Currentbl 13652

Difference 00267

IDAI0 FY94-FY96) 14587 Currentbl 13652

Difference 00935

IDAll (1Y97-02l1198) 13969 Currentbl 13652

Difference 00317

a Value of USD vs SDR using 8ve~e exchange rates

Foreign Exchange (gain) or loss to the borrower by

borrowing USD instead of SDR

-2444

-2301

-400

192

641

227

b AvenrgetXchange rates from 01-jul-1997to 31-Dec-1997 c For comparison purposes we have included FY84 as part of [DAG

46 In considering whether IDA could offer currency choice to its borrowers we considered two options Option A would consist of offering currency choice at the time of commitment Unfortunately this would heighten both the risk of commitment shortfall and the risk of inadequate resources for disbursements for IDA

- 20-

In other words Option A could potentially bring us back to the situation prevailing before IDA6

47 Option B would consist of committing and disbursing in SDR-as IDA does at present-and giving borrowers the right to conven their liability into a specific currency upon completion of disbursements This might be less risky for IDA It would retain the current commitment and disbursement mismatches but would not heighten them during the disbursement period However it might heighten the mismatch between the currency composition of IDA reflows and the SDR by giving borrowers choice on the currency denomination of repayments Assuming that all borrowers were to choose USD26

IDAs currency exposure would change as shown in Table 8

26

Table 8 Surplus (Shortfall) ID Currency of IDA Resources vs the SDR

Counting Reflows Until FY2010 FY2015 FY2010

Status Quo US Dollars 044 231 300 Deutsche Mark group -539 -472 -402 Japanese Yen 134 099 094 French Franc -2250 middot221 -207 Pound Sterling -367 -337 -301 Others 953 699 516

Option A -- All Credits (Conversion from SDR to USD) US Dollars 1773 2811 3566 Deutsche Mark group -1088 -1290 -1437 Japanese Yen -404 -705 -924 French Franc -505 -638 -735 Pound Sterling middot733 -882 -991 Others 957 704 520

Option B -- New Credits Only (Conversion from SDR to USD) US Dollars 153 631 1083 Deutsche Mark group -572 -599 -650 Japanese Yen 100 -026 -150 French Franc -243 -285 -333 Pound Sterling -389 -421 -467 Others 950 700 517

If IDA borrowers were to be offered currency choice there might be cases where individual choices would in their aggregate reduce IDNs currency risk exposure IDA countries in the CFA zone might for example choose FRF instead of USD In order to get a measure of risk however it is useful to consider the case where all IDA borrowers would choose the same currency

i~1tmiddottc

- 21-

48 Table 8 shows that a conversion of the stock of outstanding credits from SDR into USD would trigger a dramatic and unmanClgeable shift in IDAs currency exposure towards the USD In addition Table 8 shows that offering currency choice on new credits would in the event that all borrowers chose USD also increase IDAs currency exposure albeit more gradually

49 In addition to potentially increasing IDAs currency exposure offering currency choice raises an important problem with respect to pricing Ideally the grant element attached to IDA credits would have to remain equivalent in all three currencies in order to ensure that the borrower is not faced with a price bias with respect to currency choice This implies that in order to offer arbitrage-free currency choice to its borrowers IDA would have to calculate and set different service charges across currenCIes

50 If the offer of currency choice by IDA was an urgently needed tool to assist IDA borrowers in reducing sovereign risk exposure in as much as the possible reduction of sovereign risk exposure would have a fundamental impact on their economic development there might be a need to pursue this idea But this is not the case In assessing the merits of offering currency choice to IDA borrowers donors must consider IDAs limited share of each countrys overall sovereign debt and the high grant element of IDA credits IDAs limited capacity to manage currency risk and the pricing difficulties which it would face in the implementation should also be noted In view of these constraints IDA management does not consider offering currency choice as a priority at this time but proposes to keep the issue under review in subsequent replenishments

- 22-

Conclusion

51 We conclude that IDA has the necessary tools to manage its resources effectively Nonetheless IDA does face a number of risks and issues which must be carefully managed and Deputies views on these issues will be important to guide IDA management in dealing with them Specifically

bull IDA relies on donor resources for the bulk of its commitment authority Donor resources are expected to represent 58 of IDA lending in IDAl2 and IDA13 Thereafter RITO commitment authority is expected to increase dramatically as a proportion of IDA lending-to reach more than 80 of IDA lending by IDA16

bull IDAs encashment of donor notes in the next few replenishments shows some fluctuation but can be smoothed if donors would find this helpful so that future encashments will decline fairly evenly over the next 10 to 15 years while maintaining the same present value of donor commitments to IDA

bull IDAs RITO liquidity is high but is largely already committed or programmed for commitment It will decline over the medium term In the interim this RITO liquidity allows IDA to reduce significantly its exposure to currency fluctuations As the level of liquidity declines however IDAs capacity to mitigate these risks will also be reduced

bull IDA carries donor liquidity equivalent to only 6 to 8 weeks of disbursement needs (apart from donor contributions encashed in advance as in IDAlO but not available for lending) This low threshold for encashing donor contributions is made possible because of the high level of RITO liquidity

bull If IDA were to offer single currency credits at this time it would appreciably increase IDAs currency exposure (assuming borrowers will predominantly choose the same one or two currency-denominations) Given the long-term nature of IDA credits IDA management believes that it is appropriate for IDA to continue to denominate its credits in SDR at this time and to again review the options in this regard in subsequent replenishments

- 23-

Annex 1

Transition to Self-Sustainability

1 In the IDAll Replenishment Report the IDA Deputies requested that IDA management undertake further study whether and when IDA could eventually become self-financing-that is no longer in need of donor contributions This could involve the criteria for graduation of borrowers possible changes in lending terms and other issues27

raquo

The Growth in Commitment Authority from RITO Resources

2 Credit Repayments The growth in IDA lending over the last two decades and the maturing of the credit portfolio will lead to rapidly increasing credit repayments over the medium to long term Credit repayment projections which amount to USD 679 million in FY98 should increase to reach more than USD 3 billion per year during IDA15 (FY09-11) and close to USD 55 billion per year during IDA18 (FYI 8-20)

3 Investment Income and Service Charge The investment income IDA earns on its liquid balances also provides additional resources Investment income was relatively small in the past During IDA 11 investment income has been averaging USD 260 million per year reflecting a higher level of liquidity than earlier As RITO liquidity is expected to decline to reach its lowest level during the course of IDAI5 investment income will decline concomitantly from about USD 200 million per year during the course of IDAl2 to as low as USD 50 million per year during the course ofIDA15 as shown on Table 9 Service charge receipts28 net of administrative expenses are small and are not considered for the purpose of this analysis

4 Commitment Authority Because IDA credits are disbursed over a six to eight year period on average and the level of scheduled repayments on existing credits is known well into the future it is possible for IDA to make commitments today for which future disbursements will be funded from credit repayments As a result of this ability to make advance commitments IDAs commitment authority from credit repayments exceeds the level of resource inflows at the time of commitment Given the typical disbursement profile of IDA credits and IDAs overall portfolio profile the commitment authority available from RITO resources which is expected to represent more than twice the amount of credit repayments during IDA12 is expected to be at the same level as credit repayments during DA15 and to exceed credit repayments by

27

28

IDAlR96-64 dated April 17 1996 para 48

IDAs service charge (075 of outstanding credits) is intended to cover administrative expenses In FY97 IDA service charge receipts totaled USD 547 million while administrative expenses totaled USD 504 million The difference between service charge receipts and administrative expenses is projected to remain slightly positive during the rest of the IDAll period

- 20-

In other words Option A could potentially bring us back to the situation prevailing before IDA6

47 Option B would consist of committing and disbursing in SDR-as IDA does at present-and giving borrowers the right to conven their liability into a specific currency upon completion of disbursements This might be less risky for IDA It would retain the current commitment and disbursement mismatches but would not heighten them during the disbursement period However it might heighten the mismatch between the currency composition of IDA reflows and the SDR by giving borrowers choice on the currency denomination of repayments Assuming that all borrowers were to choose USD26

IDAs currency exposure would change as shown in Table 8

26

Table 8 Surplus (Shortfall) ID Currency of IDA Resources vs the SDR

Counting Reflows Until FY2010 FY2015 FY2010

Status Quo US Dollars 044 231 300 Deutsche Mark group -539 -472 -402 Japanese Yen 134 099 094 French Franc -2250 middot221 -207 Pound Sterling -367 -337 -301 Others 953 699 516

Option A -- All Credits (Conversion from SDR to USD) US Dollars 1773 2811 3566 Deutsche Mark group -1088 -1290 -1437 Japanese Yen -404 -705 -924 French Franc -505 -638 -735 Pound Sterling middot733 -882 -991 Others 957 704 520

Option B -- New Credits Only (Conversion from SDR to USD) US Dollars 153 631 1083 Deutsche Mark group -572 -599 -650 Japanese Yen 100 -026 -150 French Franc -243 -285 -333 Pound Sterling -389 -421 -467 Others 950 700 517

If IDA borrowers were to be offered currency choice there might be cases where individual choices would in their aggregate reduce IDNs currency risk exposure IDA countries in the CFA zone might for example choose FRF instead of USD In order to get a measure of risk however it is useful to consider the case where all IDA borrowers would choose the same currency

i~1tmiddottc

- 21-

48 Table 8 shows that a conversion of the stock of outstanding credits from SDR into USD would trigger a dramatic and unmanClgeable shift in IDAs currency exposure towards the USD In addition Table 8 shows that offering currency choice on new credits would in the event that all borrowers chose USD also increase IDAs currency exposure albeit more gradually

49 In addition to potentially increasing IDAs currency exposure offering currency choice raises an important problem with respect to pricing Ideally the grant element attached to IDA credits would have to remain equivalent in all three currencies in order to ensure that the borrower is not faced with a price bias with respect to currency choice This implies that in order to offer arbitrage-free currency choice to its borrowers IDA would have to calculate and set different service charges across currenCIes

50 If the offer of currency choice by IDA was an urgently needed tool to assist IDA borrowers in reducing sovereign risk exposure in as much as the possible reduction of sovereign risk exposure would have a fundamental impact on their economic development there might be a need to pursue this idea But this is not the case In assessing the merits of offering currency choice to IDA borrowers donors must consider IDAs limited share of each countrys overall sovereign debt and the high grant element of IDA credits IDAs limited capacity to manage currency risk and the pricing difficulties which it would face in the implementation should also be noted In view of these constraints IDA management does not consider offering currency choice as a priority at this time but proposes to keep the issue under review in subsequent replenishments

- 22-

Conclusion

51 We conclude that IDA has the necessary tools to manage its resources effectively Nonetheless IDA does face a number of risks and issues which must be carefully managed and Deputies views on these issues will be important to guide IDA management in dealing with them Specifically

bull IDA relies on donor resources for the bulk of its commitment authority Donor resources are expected to represent 58 of IDA lending in IDAl2 and IDA13 Thereafter RITO commitment authority is expected to increase dramatically as a proportion of IDA lending-to reach more than 80 of IDA lending by IDA16

bull IDAs encashment of donor notes in the next few replenishments shows some fluctuation but can be smoothed if donors would find this helpful so that future encashments will decline fairly evenly over the next 10 to 15 years while maintaining the same present value of donor commitments to IDA

bull IDAs RITO liquidity is high but is largely already committed or programmed for commitment It will decline over the medium term In the interim this RITO liquidity allows IDA to reduce significantly its exposure to currency fluctuations As the level of liquidity declines however IDAs capacity to mitigate these risks will also be reduced

bull IDA carries donor liquidity equivalent to only 6 to 8 weeks of disbursement needs (apart from donor contributions encashed in advance as in IDAlO but not available for lending) This low threshold for encashing donor contributions is made possible because of the high level of RITO liquidity

bull If IDA were to offer single currency credits at this time it would appreciably increase IDAs currency exposure (assuming borrowers will predominantly choose the same one or two currency-denominations) Given the long-term nature of IDA credits IDA management believes that it is appropriate for IDA to continue to denominate its credits in SDR at this time and to again review the options in this regard in subsequent replenishments

- 23-

Annex 1

Transition to Self-Sustainability

1 In the IDAll Replenishment Report the IDA Deputies requested that IDA management undertake further study whether and when IDA could eventually become self-financing-that is no longer in need of donor contributions This could involve the criteria for graduation of borrowers possible changes in lending terms and other issues27

raquo

The Growth in Commitment Authority from RITO Resources

2 Credit Repayments The growth in IDA lending over the last two decades and the maturing of the credit portfolio will lead to rapidly increasing credit repayments over the medium to long term Credit repayment projections which amount to USD 679 million in FY98 should increase to reach more than USD 3 billion per year during IDA15 (FY09-11) and close to USD 55 billion per year during IDA18 (FYI 8-20)

3 Investment Income and Service Charge The investment income IDA earns on its liquid balances also provides additional resources Investment income was relatively small in the past During IDA 11 investment income has been averaging USD 260 million per year reflecting a higher level of liquidity than earlier As RITO liquidity is expected to decline to reach its lowest level during the course of IDAI5 investment income will decline concomitantly from about USD 200 million per year during the course of IDAl2 to as low as USD 50 million per year during the course ofIDA15 as shown on Table 9 Service charge receipts28 net of administrative expenses are small and are not considered for the purpose of this analysis

4 Commitment Authority Because IDA credits are disbursed over a six to eight year period on average and the level of scheduled repayments on existing credits is known well into the future it is possible for IDA to make commitments today for which future disbursements will be funded from credit repayments As a result of this ability to make advance commitments IDAs commitment authority from credit repayments exceeds the level of resource inflows at the time of commitment Given the typical disbursement profile of IDA credits and IDAs overall portfolio profile the commitment authority available from RITO resources which is expected to represent more than twice the amount of credit repayments during IDA12 is expected to be at the same level as credit repayments during DA15 and to exceed credit repayments by

27

28

IDAlR96-64 dated April 17 1996 para 48

IDAs service charge (075 of outstanding credits) is intended to cover administrative expenses In FY97 IDA service charge receipts totaled USD 547 million while administrative expenses totaled USD 504 million The difference between service charge receipts and administrative expenses is projected to remain slightly positive during the rest of the IDAll period

- 21-

48 Table 8 shows that a conversion of the stock of outstanding credits from SDR into USD would trigger a dramatic and unmanClgeable shift in IDAs currency exposure towards the USD In addition Table 8 shows that offering currency choice on new credits would in the event that all borrowers chose USD also increase IDAs currency exposure albeit more gradually

49 In addition to potentially increasing IDAs currency exposure offering currency choice raises an important problem with respect to pricing Ideally the grant element attached to IDA credits would have to remain equivalent in all three currencies in order to ensure that the borrower is not faced with a price bias with respect to currency choice This implies that in order to offer arbitrage-free currency choice to its borrowers IDA would have to calculate and set different service charges across currenCIes

50 If the offer of currency choice by IDA was an urgently needed tool to assist IDA borrowers in reducing sovereign risk exposure in as much as the possible reduction of sovereign risk exposure would have a fundamental impact on their economic development there might be a need to pursue this idea But this is not the case In assessing the merits of offering currency choice to IDA borrowers donors must consider IDAs limited share of each countrys overall sovereign debt and the high grant element of IDA credits IDAs limited capacity to manage currency risk and the pricing difficulties which it would face in the implementation should also be noted In view of these constraints IDA management does not consider offering currency choice as a priority at this time but proposes to keep the issue under review in subsequent replenishments

- 22-

Conclusion

51 We conclude that IDA has the necessary tools to manage its resources effectively Nonetheless IDA does face a number of risks and issues which must be carefully managed and Deputies views on these issues will be important to guide IDA management in dealing with them Specifically

bull IDA relies on donor resources for the bulk of its commitment authority Donor resources are expected to represent 58 of IDA lending in IDAl2 and IDA13 Thereafter RITO commitment authority is expected to increase dramatically as a proportion of IDA lending-to reach more than 80 of IDA lending by IDA16

bull IDAs encashment of donor notes in the next few replenishments shows some fluctuation but can be smoothed if donors would find this helpful so that future encashments will decline fairly evenly over the next 10 to 15 years while maintaining the same present value of donor commitments to IDA

bull IDAs RITO liquidity is high but is largely already committed or programmed for commitment It will decline over the medium term In the interim this RITO liquidity allows IDA to reduce significantly its exposure to currency fluctuations As the level of liquidity declines however IDAs capacity to mitigate these risks will also be reduced

bull IDA carries donor liquidity equivalent to only 6 to 8 weeks of disbursement needs (apart from donor contributions encashed in advance as in IDAlO but not available for lending) This low threshold for encashing donor contributions is made possible because of the high level of RITO liquidity

bull If IDA were to offer single currency credits at this time it would appreciably increase IDAs currency exposure (assuming borrowers will predominantly choose the same one or two currency-denominations) Given the long-term nature of IDA credits IDA management believes that it is appropriate for IDA to continue to denominate its credits in SDR at this time and to again review the options in this regard in subsequent replenishments

- 23-

Annex 1

Transition to Self-Sustainability

1 In the IDAll Replenishment Report the IDA Deputies requested that IDA management undertake further study whether and when IDA could eventually become self-financing-that is no longer in need of donor contributions This could involve the criteria for graduation of borrowers possible changes in lending terms and other issues27

raquo

The Growth in Commitment Authority from RITO Resources

2 Credit Repayments The growth in IDA lending over the last two decades and the maturing of the credit portfolio will lead to rapidly increasing credit repayments over the medium to long term Credit repayment projections which amount to USD 679 million in FY98 should increase to reach more than USD 3 billion per year during IDA15 (FY09-11) and close to USD 55 billion per year during IDA18 (FYI 8-20)

3 Investment Income and Service Charge The investment income IDA earns on its liquid balances also provides additional resources Investment income was relatively small in the past During IDA 11 investment income has been averaging USD 260 million per year reflecting a higher level of liquidity than earlier As RITO liquidity is expected to decline to reach its lowest level during the course of IDAI5 investment income will decline concomitantly from about USD 200 million per year during the course of IDAl2 to as low as USD 50 million per year during the course ofIDA15 as shown on Table 9 Service charge receipts28 net of administrative expenses are small and are not considered for the purpose of this analysis

4 Commitment Authority Because IDA credits are disbursed over a six to eight year period on average and the level of scheduled repayments on existing credits is known well into the future it is possible for IDA to make commitments today for which future disbursements will be funded from credit repayments As a result of this ability to make advance commitments IDAs commitment authority from credit repayments exceeds the level of resource inflows at the time of commitment Given the typical disbursement profile of IDA credits and IDAs overall portfolio profile the commitment authority available from RITO resources which is expected to represent more than twice the amount of credit repayments during IDA12 is expected to be at the same level as credit repayments during DA15 and to exceed credit repayments by

27

28

IDAlR96-64 dated April 17 1996 para 48

IDAs service charge (075 of outstanding credits) is intended to cover administrative expenses In FY97 IDA service charge receipts totaled USD 547 million while administrative expenses totaled USD 504 million The difference between service charge receipts and administrative expenses is projected to remain slightly positive during the rest of the IDAll period

- 22-

Conclusion

51 We conclude that IDA has the necessary tools to manage its resources effectively Nonetheless IDA does face a number of risks and issues which must be carefully managed and Deputies views on these issues will be important to guide IDA management in dealing with them Specifically

bull IDA relies on donor resources for the bulk of its commitment authority Donor resources are expected to represent 58 of IDA lending in IDAl2 and IDA13 Thereafter RITO commitment authority is expected to increase dramatically as a proportion of IDA lending-to reach more than 80 of IDA lending by IDA16

bull IDAs encashment of donor notes in the next few replenishments shows some fluctuation but can be smoothed if donors would find this helpful so that future encashments will decline fairly evenly over the next 10 to 15 years while maintaining the same present value of donor commitments to IDA

bull IDAs RITO liquidity is high but is largely already committed or programmed for commitment It will decline over the medium term In the interim this RITO liquidity allows IDA to reduce significantly its exposure to currency fluctuations As the level of liquidity declines however IDAs capacity to mitigate these risks will also be reduced

bull IDA carries donor liquidity equivalent to only 6 to 8 weeks of disbursement needs (apart from donor contributions encashed in advance as in IDAlO but not available for lending) This low threshold for encashing donor contributions is made possible because of the high level of RITO liquidity

bull If IDA were to offer single currency credits at this time it would appreciably increase IDAs currency exposure (assuming borrowers will predominantly choose the same one or two currency-denominations) Given the long-term nature of IDA credits IDA management believes that it is appropriate for IDA to continue to denominate its credits in SDR at this time and to again review the options in this regard in subsequent replenishments

- 23-

Annex 1

Transition to Self-Sustainability

1 In the IDAll Replenishment Report the IDA Deputies requested that IDA management undertake further study whether and when IDA could eventually become self-financing-that is no longer in need of donor contributions This could involve the criteria for graduation of borrowers possible changes in lending terms and other issues27

raquo

The Growth in Commitment Authority from RITO Resources

2 Credit Repayments The growth in IDA lending over the last two decades and the maturing of the credit portfolio will lead to rapidly increasing credit repayments over the medium to long term Credit repayment projections which amount to USD 679 million in FY98 should increase to reach more than USD 3 billion per year during IDA15 (FY09-11) and close to USD 55 billion per year during IDA18 (FYI 8-20)

3 Investment Income and Service Charge The investment income IDA earns on its liquid balances also provides additional resources Investment income was relatively small in the past During IDA 11 investment income has been averaging USD 260 million per year reflecting a higher level of liquidity than earlier As RITO liquidity is expected to decline to reach its lowest level during the course of IDAI5 investment income will decline concomitantly from about USD 200 million per year during the course of IDAl2 to as low as USD 50 million per year during the course ofIDA15 as shown on Table 9 Service charge receipts28 net of administrative expenses are small and are not considered for the purpose of this analysis

4 Commitment Authority Because IDA credits are disbursed over a six to eight year period on average and the level of scheduled repayments on existing credits is known well into the future it is possible for IDA to make commitments today for which future disbursements will be funded from credit repayments As a result of this ability to make advance commitments IDAs commitment authority from credit repayments exceeds the level of resource inflows at the time of commitment Given the typical disbursement profile of IDA credits and IDAs overall portfolio profile the commitment authority available from RITO resources which is expected to represent more than twice the amount of credit repayments during IDA12 is expected to be at the same level as credit repayments during DA15 and to exceed credit repayments by

27

28

IDAlR96-64 dated April 17 1996 para 48

IDAs service charge (075 of outstanding credits) is intended to cover administrative expenses In FY97 IDA service charge receipts totaled USD 547 million while administrative expenses totaled USD 504 million The difference between service charge receipts and administrative expenses is projected to remain slightly positive during the rest of the IDAll period

- 23-

Annex 1

Transition to Self-Sustainability

1 In the IDAll Replenishment Report the IDA Deputies requested that IDA management undertake further study whether and when IDA could eventually become self-financing-that is no longer in need of donor contributions This could involve the criteria for graduation of borrowers possible changes in lending terms and other issues27

raquo

The Growth in Commitment Authority from RITO Resources

2 Credit Repayments The growth in IDA lending over the last two decades and the maturing of the credit portfolio will lead to rapidly increasing credit repayments over the medium to long term Credit repayment projections which amount to USD 679 million in FY98 should increase to reach more than USD 3 billion per year during IDA15 (FY09-11) and close to USD 55 billion per year during IDA18 (FYI 8-20)

3 Investment Income and Service Charge The investment income IDA earns on its liquid balances also provides additional resources Investment income was relatively small in the past During IDA 11 investment income has been averaging USD 260 million per year reflecting a higher level of liquidity than earlier As RITO liquidity is expected to decline to reach its lowest level during the course of IDAI5 investment income will decline concomitantly from about USD 200 million per year during the course of IDAl2 to as low as USD 50 million per year during the course ofIDA15 as shown on Table 9 Service charge receipts28 net of administrative expenses are small and are not considered for the purpose of this analysis

4 Commitment Authority Because IDA credits are disbursed over a six to eight year period on average and the level of scheduled repayments on existing credits is known well into the future it is possible for IDA to make commitments today for which future disbursements will be funded from credit repayments As a result of this ability to make advance commitments IDAs commitment authority from credit repayments exceeds the level of resource inflows at the time of commitment Given the typical disbursement profile of IDA credits and IDAs overall portfolio profile the commitment authority available from RITO resources which is expected to represent more than twice the amount of credit repayments during IDA12 is expected to be at the same level as credit repayments during DA15 and to exceed credit repayments by

27

28

IDAlR96-64 dated April 17 1996 para 48

IDAs service charge (075 of outstanding credits) is intended to cover administrative expenses In FY97 IDA service charge receipts totaled USD 547 million while administrative expenses totaled USD 504 million The difference between service charge receipts and administrative expenses is projected to remain slightly positive during the rest of the IDAll period

- 24-

about 15 during the course ofIDA18 as shown on Table 9 The table provides an estimate of the commitment authority from RITO resources that would be available over the 21 years spanning the IDA12 to IDA18 periods

Table 9 Transition to Self-Sustainability Scenario (USD million

IDA12 IDAB IDA14 IDA1S IDA16 IDA17 IDA1S --Lending Plan 21612 21326 19880 18882 18988 19459

Lending Plan (SDR billion) 160 158 147 140 141 144

Donor Resources 12686 12374 10970 9771 3598 1234

Donor Resources (SDR billion) 94 92 81 72 27 09

RITO Commitment Authoriy 8926 8952 8910 9111 15390 18225

Credit Repayments 3518 5294 7053 9188 11680 14048

Investment Income 619 470 249 155 250 324

Chart 3 Transition to Self-Sustaioability Scenario

25000 --_________________________ ---

fI

= 20000

~ ~ 15000

Q rn l 10000

5000

Lending Plan ------- ~ --- --- --- --- --- -- - - - - -

----- --_ DoDOr Resources

RITO Commitment Authority

- - -----o ~ ____ ~ _______ ~ ______ ~ ________ ~ ______ ~ ______ ~

19821

147 1191

09

18630 16362

239

IDAI2 IDA13 IDAl4 IDA I 5 IDA16 IDAl7 IDAl8

Reaching the Point of Self-Financing

6 Future IDA Lending The point at which IDA could be largely self-fmancing depends on both the level of commitment authority available from RITO resources and the assumed level of IDA lending The demand for IDA lending will be affected by lending levels in each country and by the pattern of graduation of IDA borrowers As a way to identify a path towards self-sustainability we have developed the base case IDA lending scenario which appears in Table 9 and Chart 3 This scenario assumes that countries will graduate from IDA when their per capita income reaches the IDA

- 25-

operational cutoff29 To derive an estimate of future growth performance IDA countries were placed into three growth categories (low medium and high) based on both their recent and currently projected growth performance An assumed growth rate was assigned to each of these groups and a hypothetical graduation year was identified A second basic assumption was that lending to IDA-only countries until graduation would be maintained in real terms from their planned IDAII levels while lending to blend countries until graduation would only remain constant in nominal terms The overall lending program declines until the point where blends have been phased out and remains flat in real terms beyond that point

7 Table 9 and Chart 3 show that the level of donor contributions would start declining gradually during the course of IDA 13 (FY03-05) would decline sharply during the course of IDAI5 (FY09-11) and would reach a substantially lower level of around usn 12 billion during the course of IDAI7 (FY15-I7) With the level of donor resources required by IDA representing less than 7 of IDA lending by the beginning of FYI5 it might be appropriate to declare IDA self-financing by that point

29 The historical per capita income (1995) ceiling for IDA eligibility is USD 1465 The operational IDA eligibility cutoff is USD 905 For the purpose of this analysis the operational cutoff is used

- 25-

operational cutoff29 To derive an estimate of future growth performance IDA countries were placed into three growth categories (low medium and high) based on both their recent and currently projected growth performance An assumed growth rate was assigned to each of these groups and a hypothetical graduation year was identified A second basic assumption was that lending to IDA-only countries until graduation would be maintained in real terms from their planned IDAII levels while lending to blend countries until graduation would only remain constant in nominal terms The overall lending program declines until the point where blends have been phased out and remains flat in real terms beyond that point

7 Table 9 and Chart 3 show that the level of donor contributions would start declining gradually during the course of IDA 13 (FY03-05) would decline sharply during the course of IDAI5 (FY09-11) and would reach a substantially lower level of around usn 12 billion during the course of IDAI7 (FY15-I7) With the level of donor resources required by IDA representing less than 7 of IDA lending by the beginning of FYI5 it might be appropriate to declare IDA self-financing by that point

29 The historical per capita income (1995) ceiling for IDA eligibility is USD 1465 The operational IDA eligibility cutoff is USD 905 For the purpose of this analysis the operational cutoff is used

- 26-

Annex 2

Impact of the HIPe Debt Initiative on RITO Resources

1 The World Bank plays a key role in the implementation of the HIPC Debt Initiative Debt relief to qualifying HIPCs is to be provided on IDA debt In the first instance the Bank plans to use the HIPC Trust Fund30 to purchase IDA credits at a price determined by using the methodology used by the Bank and the IMF for the preparation of the countrys Debt Sustainability Analysis IDA will receive cash from the HIPC Trust Fund and the Trust Fund will cancel the credits upon completion of the purchase transaction In a few cases the Trust Fund will pay IDA debt service on behalf of the qualifying HIPCs

2 In addition IDA will provide grant funding to qualifying HIPCs during their Interim Period31 The additional concessionality provided by grant funding-as compared to that provided by an IDA credit-will count towards the amount of debt relief to be provided by the World Bank to qualifying HIPCs under the Initiative

3 Both IDA grant funding to qualifying RIPCs during their respective Interim Periods and the purchase of IDA credits by the RIPC Trust Fund at their respective Completion Points will have an impact on IDAs reflows over the long run The rest of this sub-section provides a description of the impact of the HIPC Debt Initiative on IDA together with a rough estimate of its potential size and timing (as illustrated on Table 10) based on estimates32 of the amount and structure of debt relief operations expected to benefit the thineen HIPCs that are expected to qualify and to reach their respective Decision Points before FYOO

30

31

32

The World Bank component of the HlPC Trust Fund has been funded by transfers from mRD net income (USD 500 million from FY96 net income and USD 250 million from FY97 net income) Based on current estimates the amount available in the Trust Fund (USD 750 million) together with the additional debt relief to be provided by means of IDA grant funding should be adequate to cover the Banks share of the implementation costs of the Initiative through the coming year

The Interim Period is the period between the Decision Point (at which creditors decide that an eligible HlPC qualifies for debt relief under the Initiative and agree with the government on the terms and conditions of the debt relief package) and the Completion Point (at which the bulk of the debt relief is to have been provided)

The timing and the size of this financial impact will depend on a number of factors including the results of each eligible HIPCs Debt Sustainability Analysis and decisions made by the Executive Directors of the Bank and the IMP concerning the terms of each qualifying HlPCs debt relief package

- 27 ~

Table 10 Impact of the RIPC Debt Initiative on RITa Resources (USD million)

IDA 11 IDA 12 IDA 13 IDA14 IDA15 IDA16 FY97-99 FYOO-02 FY03-05 FY06-08 FY09-11 FY12-14

1 RIPe Trust Fund Purchase of IDA credits a) IDA cash receipts 170 526 - - - -b) Reduction in repayments (5) (47) (87) (123) (134) (134) c) Reduction in service charges (2) (12) (28) (26) (23) (20) Coverage of IDA debt service - - - - - -

2 IDA Grant Funding a) Reduction in repayments - - - g~) (44) g~ b) Reduction in service charges - (4) (16) (27)

Net Impact on RITO Resources 163 63 (131) (178) (218t (251)

4 In the case of the purchase by the HIPC Trust Fund of an IDA credit IDA receives cash at the time of the transaction but foregoes the principal repayments and the service charge payments it would have otherwise received During the course of the FY98~2 period the HIPC Trust Fund could pay an estimated USD 700 million to IDA for the purchase of credits-with an estimated face value of USD 14 billionshyowed by the group of the first thirteen countries qualifying for debt relief under the Initiative The reduction in principal repayments starts at USD 5 million in FY99 rises to USD 15 million per year during IDA12 reaches USD 45 million per year during IDA15 and starts to decline gradually at the end of IDA17 The reduction in service charge payments is also small reaching about USD 10 million per year during IDA13 before declining gradually to reach USD 5 million per year during IDA17

5 In the few cases where the HIPC Trust Fund would pay IDA debt service on behalf of a qualifying HIPC there would be no impact on IDAs fmancial flows

6 In the case of IDA grant funding IDA will merely be changing the terms of a share of the qualifying HIPCs IDA lending program IDA will therefore forego the principal repayments and the service charge payments associated with a share of its lending program Given the existence of a ten~year grace period for new credits grant funding will only begin to have an impact on IDAs financial flows in FY08 Over the FY98~FY02 period IDA grant funding could amount to USD 12 billion As a result the reduction in principal repayments will start at USD 3 million in IDA14 and rise to USD 72 million in IDA16 before leveling off to USD 50 million in FY22 By comparison scheduled principal repayments on IDA credits would total USD 36 billion during IDA12 and USD 72 billion during IDA14 The reduction in service charge payments will be about USD 4 million in IDA12 and will average USD 9 million during the period going from IDA14 to IDA16 By comparison service charge payments are expected to amount to an average of USD 600 million during IDA11

IDA17 FY15-17

-(134) (17) -

g~~ (247)

- 28-

7 Overall the provision of debt relief by the Bank on IDA debt owed by qualifying HIPCs will have a relatively small impact on IDAs financial flows During the course of IDAl2 because of credit purchases by the HIPe Trust Fund IDA stands to receive cash inflows of about USD 400 million During the course of the following replenishment periods reflows should decrease by an average of USD 200 million per three-year replenishment period-which is equivalent to less than 4 of overall scheduled reflows

middot

- 28-

7 Overall the provision of debt relief by the Bank on IDA debt owed by qualifying HIPCs will have a relatively small impact on IDAs financial flows During the course of IDAl2 because of credit purchases by the HIPe Trust Fund IDA stands to receive cash inflows of about USD 400 million During the course of the following replenishment periods reflows should decrease by an average of USD 200 million per three-year replenishment period-which is equivalent to less than 4 of overall scheduled reflows

middot