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Recommendation from Consultation on 6 th Replenishment

Asset Liability Management Framework Consultation on 7 th Replenishment – 2 nd Session Rome, 21-22 April 2005. 2. Recommendation from Consultation on 6 th Replenishment. Consultation on 6 th Replenishment. Review of Investment Policy in 2003: Security of Investments

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Recommendation from Consultation on 6 th Replenishment

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  1. Asset Liability Management FrameworkConsultation on 7th Replenishment – 2nd Session Rome, 21-22 April 2005

  2. 2 Recommendation from Consultation on 6th Replenishment Consultation on 6th Replenishment • Review of Investment Policy in 2003: • Security of Investments • Periodic Reporting to Executive Board • Asset Liability Management (ALM) ALM Review December 2003: Endorsed by Executive Board June 2004: Executive Board Informal Seminar on Implementation Status 4 Action Points

  3. 3 Asset Liability Management (ALM) • Asset Liability Management (ALM): • The ongoing process of formulating, implementing, monitoring and revising strategies on assets and liabilities to achieve an organization’s financial objectives, given the organization’s risk tolerances and other constraints • Goal of IFAD ALM: • Optimize the use of resources by maximising loan and grant approvals while minimising financial risks

  4. 4 Implementation of ALM Framework: 4 Action Points •  Action 1: ALM section created in Treasury Focal point for IFAD’s ALM functionality Expanded financial model to align it to ALM framework •  Action 2: Reduced currency risk Elimination of unhedged currency exposures •  Action 3: Reduced market risk Liquidation of remaining equities portfolio An allocation to Held-to-Maturity investments •  Action 4: Definition of committable resources Proposal for 7th Replenishment discussions

  5. 5 Financial Resource Management and the Definition of Committable Resources • Current practice: • Full upfront financial backing: Committable resources include cash, investments and promissory notes • Advance commitment authority (ACA): Maximum 3 years of loan reflows (6th Replenishment resolution)

  6. 6 Financial Resource Management and the Definition of Committable Resources (cont’d) • Proposed ALM definition of committable resources: • Include contributions receivables and portion of loan receivables (both net of allowances) • Advantages: • Increases new loan and grant approvals • Calibrates liquidity to meet disbursement requirements (loans, grants, administrative expenditures) • Uses earlier Members’ contributions more efficiently (contributions receivables but also loan repayments) • Benefits from 28 years track records (only 2.7% of loans require an allowance) • Reallocates assets from investment portfolio to loans outstanding

  7. 7 Financial Resource Management and the Definition of Committable Resources (cont’d) • Proposed • Definition • 2 722 268 258 154 919 4 321 268 95 2 918 1 040 n.a. n.a. n.a. • COMMITTABLE RESOURCES • Current • Definition • Cash & investments 2 722 Promissory notes (net) 268 Contrib.receivables (net) - Other receivables 154 Loans outstanding (net) - TOTAL ASSETS 3 144 Less- Payables, liabilities and PDFF 268 General Reserve 95 Undisbursed loans and grants 2 918 NET RESOURCES (137) ACA approved by EB 137 ACA ceiling 653 Unused ACA 516 • BALANCE SHEET • 31 December 2004 • Cash & investments 2 722 Promissory notes (net) 270 Contrib. receivables (net) 258 Other receivables 154 Loans outstanding (net) 3 799 TOTAL ASSETS 7 203 • Payables & liabilities 264 Undisbursed grants 36 Contributions 4 668 Fully committed retained earnings 2 140 General Reserve 95 • TOTAL LIABILITIES, • CONTRIBUTIONS, • RETAINED EARNINGS 7 203

  8. IFAD IDA FSO AsDF AfDF ALM Framework Status Yes (since 2004) Yes FSO: No IADB: Yes; makes FSO investment decisions Under discussion Yes Included in Committable Resources a. Contributions b. Loan reflows c. Invest.income d. Transfers from Bank Yes but excl. receivables against IOCs ACA (3 yrs principal and interest) Yes n.a. Yes 95% principal (interest at other conditions) subject to liquidity policy Yes Yes Yes Unlimited subject to liquidity policy Yes Yes Yes but excl. receivables against IOCs 85% principal (interest at other conditions) subject to liquidity policy Yes Yes Yes 85% principal (interest atother conditions) subject to liquidity policy Yes Yes 8 Comparison of IFAD with other IFI’s IFAD generally has a more conservative approach than other IFIs

  9. 9 Scenario for 7th Replenishment • Comparing the proposed ALM definition versus current definition of committable resources: • Achievable annual loan and grant approvals • Liquidity • Balance Sheet - composition of assets • Assuming: • - 10% annual growth in loan and grant approvals in 7th Repl. • - 7th Repl. of USD 800 million • - ALM definition is limited to 5 yrs of net future loan reflows

  10. 10 Scenario for 7th Replenishment (cont’d) • Achievable annual loan and grant approvals: • Current definition: • 10% annual growth in approvals in 7th Repl. • Approvals remaining during 8th Repl. at the end level of 7th Repl. with • an 8th Repl. of USD 1.1 billion (or requiring an 8th Repl. of USD 1.65 billion • to maintain 10% growth) • ALM definition: • 10% annual growth sustained in 7th and 8th Repl. with an 8th Repl. • of USD 1.1 billion Achievable Annual Loan and Grant Approvals 1 100 1 000 900 800 USD million 700 600 Current Annual Approvals 500 400 2005 2006 2007 2008 2009 2010 2011 2012 7th Repl. 8th Repl. ALM definition Currentdefinition

  11. ALM definition Currentdefinition 11 Scenario for 7th Replenishment (cont’d) • Liquidity – based on achievable loan and grant approvals: Current definition: ample liquidity • ALM definition: lower but sustainable liquidity Liquidity (Total investment portfolio) 2 800 Current Liquidity Level 2 600 USD million 2 400 2 200 2 000 1 800 2007 2008 2009 2010 2011 2012 7thRepl. 8thRepl.

  12. Contributions incl. other receivables Investment portfolio 12 Scenario for 7th Replenishment (cont’d) • Result of ALM definition of committable resources: ability to approve more loans and grants reallocation from investment portfolio to loans outstanding Balance Sheet - Composition of Assets (Based on achievable loan and grant approvals) 10 000 7 500 66% ↑ 67% 65% 65% 5 000 USD million Current Definition ALM Definition Current Definition ALM Definition 28% ↓ 27% 30% 30% 0 Current Definition ALM Definition Current Definition ALM Definition End of 7th Repl. End of 8th Repl. Loans outstanding

  13. ? Dynamic approach Approvals Current approach IFAD Inception in 1977 IFAD 28 Years in 2005 13 Asset Liability Management (ALM) • Conclusions: • To support increased demand for rural poverty reduction, IFAD could increase its loans and grants approvals by: Revisiting its definition of committable resources Proceeding cautiously and gradually towards a more dynamic financial resource management (like other IFIs) within a sound ALM framework

  14. Asset Liability Management Framework7th Replenishment Consultations – 2nd Session Rome, 21-22 April 2005

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