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The IMF’s Policy on Concessionality. MDB Meeting on Debt Issues July 9, 2008. Overview. Rationale and Modalities Implementation Conclusions. Debt Limits. The Fund introduced external debt limits in 1979 for all upper-credit-tranche arrangements (access above 25 percent of quota)

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the imf s policy on concessionality

The IMF’s Policy on Concessionality

MDB Meeting on Debt Issues

July 9, 2008

  • Rationale and Modalities
  • Implementation
  • Conclusions
debt limits
Debt Limits
  • The Fund introduced external debt limits in 1979 for all upper-credit-tranche arrangements (access above 25 percent of quota)
  • Debt limits were introduced to
    • Prevent the build-up of external debt during the period of the Fund arrangement to levels that may lead to debt-servicing problems in the medium term
    • Ensure that restraint on domestic demand is not threatened by unanticipated recourse to external financing
    • Limit a member's external vulnerability
  • The limits apply to public and publicly guaranteed debt excluding concessional loans
    • Concessional debt is excluded to help balance the need for adequate financial support with the need to control future debt-service burdens
  • The definition of concessionality used by the Fund is closely aligned to that used by other institutions for the same purpose (for example OECD for export credits and IDA)
  • ODA is still defined based on a minimum 25 percent grant element (using a flat 10 percent discount rate)
  • Efforts have been made to share and disseminate the concessionality policy widely
    • The concessionality calculator and a detailed explanation of how it is used is available on the IMF’s external website (
    • Interested parties can direct questions on the concessionality policy or the calculator through a dedicated mailbox (LendingToLICs@IMF.ORG)
    • Support to debtors is also provided as needed
concessionality and lics
Concessionality and LICs
  • All PRGFs or PSIs are expected to include a zero limit on nonconcessional borrowing
    • Concessional flows remain the most appropriate source of external finance for LICs
      • Capacity remains low and many expenditures do not generate the cash flow needed to service nonconcessional debt
      • A minimum concessionality requirement can help borrowers obtain more suitable credit terms by raising awareness among lenders of their financial vulnerabilities
concessionality and lics1
Concessionality and LICs
  • Even after debt relief, concessional resources remain the most appropriate form of financing for LICs
flexible implementation
Flexible Implementation
  • The concessionality policy continues to be applied flexibly, allowing for exceptions on a case-by-case basis
      • Based on debt sustainability, the availability of concessional resources, the strength of policies and debt management capacity, and the quality of the investment to be financed
  • The DSF has helped refine the application of the concessionality policy
non zero limits
Non-Zero Limits
  • Non-zero limits on nonconcessional debt apply in about a third of Fund-supported programs
minimum grant element
Minimum Grant Element
  • Depending on the debt sustainability outlook, the minimum grant element is adjusted upward in a program context
financing packages
Financing Packages
  • The use of combined financing instruments for a given project is growing, reflecting financial innovation and flexibility in financing design
    • This potentially increases the availability of concessional resources to LICs
  • The Fund has adapted its modalities of calculating the grant element to take this trend into account
    • A number of elements are taken into consideration to support a determination of a financing package
      • Identical intended use or purposes for the financing
      • Inter-related schedules for disbursement
      • Cross-conditions for entry into legal effect, availability of funds, and default
      • Identical parties to the financing
  • The Fund’s concessionality policy is intended to
    • Support progress toward the MDGs without creating future debt problems
    • Keep countries that have received debt relief on a sustainable track
  • The policy has been applied flexibly
    • Nonzero limits on nonconcessional borrowing apply in over 30 percent of PRGFs/PSIs
  • Despite the reduction in debt levels due to generous debt relief, debt sustainability should not be taken for granted
    • The number of low risk ratings is still too low
    • Countries remain vulnerable to shocks
  • Thus, concessional flows remain the most appropriate source of external finance for LICs
    • Need to increase concessional resources to deserving LICs
    • Need for creditor coordination to maximize the use of concessional resources
Thank you

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