The International Development Association

As already noted in section 4.2, IDA can be seen as the an-chor for the current system of concessional finance pro-vided by MDBs. As the IDA acts as a lead institution, with eligibility criteria of other concessional windows pegged to IDA thresholds, the discussion here for IDA is obvi-ously more detailed than for the ADF and the AfDF. Even the concessional IMF facilities are guided by the IDA operational cutoff in their performance-based allocation 25 This facility would follow the example set by the Agence

Française de Développement initially suggested by Cohen et al.

(2006). For how to apply the AFD loans to the IMF concessional facilities, see Borensztein et al. (2008).

a given shock into higher concessional financing needs until graduation, according to the IMF (Gündüz et al., 2013). Moreover, particularly fragile states and those emerging from conflict, may still require repeated RCF and ECF support before they are able to strengthen their macroeconomic positions sufficiently so that they no longer require longer-term Fund financing. For the peri-od 2013-35, the IMF projects the average annual demand for PRGT lending at between SDR 1.3bn and 1.7bn (USD 2.01bn and USD 2.63bn respectively).

What are the specific strategic options for the next dec-ade? For the Fund´s concessional engagement with LICs, two strategic options seem particularly worthy of further debate:

– Increasing the scope for blending subsidized resources from the PRGT with general resources of the Fund in order to preserve concessional resources for the poorer LICs. Growing divergence of economic per-formance and political stability among LICs should be reflected in a higher share of blend finance going forward²². Another important argument for raising the amount of blend finance to LICs is the budget con-straints of the traditional donor countries: blending means more leverage per given resources²³. Currently, PRGT-eligible members are presumed to blend if (i) their per capita GNI exceeds 100 percent of the IDA operational cutoff; or if (ii) their per capita GNI ex-ceeds 80 percent of the IDA operational cutoff and they also have market access as defined below²⁴; and if (iii) they are not at high risk of debt distress or in debt distress.

Increasing the share of blending could be defined as a function of

1. sustained past and prospective future access to non-concessional lending from capital markets and official lenders, including emerging partners;

22 Find a detailed discussion of blending options in IMF (2013).

23 The use of windfall profits from gold sales was an important source for subsidizing the PRGT in the recent past. The IMF Executive Board took a decision in September 2012 that would increase annual lending capacity to LICs to an estimated SDR 1.25bn on a self-sustained basis (i.e., without a further infusion of resources to the PRGT). Absent a persistent change in trends, this is sufficient to meet the average projected base level demand for PRGT resources over the next 20 years, according to Gündüz et al. (2013). Note, however, that an earlier IMF review (2012) had been less optimistic: “Updated longer-term demand projections suggest that LICs’ financing needs will outstrip the PRGT’s lend-ing capacity.” That review produced a wider margin of PRGT-demand for the same period than the recent OP#277, from SDR 1.2bn to 1.9bn, which may indicate some internal vetting.

24 The 80 percent rule currently applies to India and Pakistan (interview with C. Mumssen, March 6, 2014).

Figure 5.2: Multilateral Grant Elements per Country Group

Source: OECD (2013b).

modalities to raise the grant element of IDA financing have been suggested in the past (Martin and Johnson, 2004): either by lowering the range of debt sustainabil-ity thresholds in the CPIA framework, or by raising the range of grant elements to start from at least 30 percent.

The raised grant element could be conditioned on debt sustainability and poverty criteria.

A particular concern has been on countries for which graduation from IDA would lead to a sharp drop in avail-able financing from the WB while they still have signifi-cant poverty reduction needs and where such a drop can adversely impact their capacity to maintain their development momentum. In this context, the provision of transitional support would facilitate these countries’

progress towards the MDGs after graduation and enable IDA to contribute to that progress. Kanbur (2012) has suggested a two-window approach: The first window would be the standard window accessible only to coun-tries below the basic IDA threshold. The usual IDA proce-dures would apply to this window. The second window would be accessible by countries above the IDA threshold but below twice the threshold, which roughly corre-sponds to the historical IDA cutoff. Importantly, India (where an estimated 445 million people still live in abso-lute poverty) would be eligible for transitional support in the IDA17 period (FY15-17). Also other large countries – e.g. Vietnam, Nigeria, or Pakistan – could potentially meet the income criterion for transitional support.

(PBA) of concessional funds, although deliberately not by the WB´s Country Policy and Institutional Assessment (CPIA), considered as insufficiently transparent.²⁶ IDA, established in 1960 to complement the WB´s origi-nal lending arm (IBRD), is the largest multilateral source of assistance for the world’s 82 poorest countries, 40 of which are in Africa. IDA lends money on concessional terms. This means that IDA charges little or no interest and repayments are stretched over 25 to 40 years, includ-ing a five to ten-year grace period. IDA also provides grants to countries at risk of debt distress. Annual com-mitments averaged about USD 16bn over the last three years, with about 50 percent of that going to Africa.

Should our projections materialize with present eligibil-ity criteria still in place, future IDA engagement increas-ingly would be concentrated on mostly African fragile countries. This would imply a policy response to increase the grant element of IDA loans further. The rise of grant finance would simply reflect the structural change of IDA clients as depicted by the direction of the red arrow in Figure 5.2. This shift to higher grant elements would require more resources unless the level of IDA assistance is lowered by reducing the amount of disbursements to countries to offset the lost reflows due to grants. Two 26 Interview with Christian Mumssen, IMF office Brussels, March 6,

2014.

100 90 80 70 60 50 40 30 20 10 0

2000 2011

Fragile LDCs Non-fragile Fragile Others LMICs UMICs LDCs

Grant element, percent

An important side effect of mainstreaming climate change into IDA and other concessional windows would be the need to integrate vulnerability to environmental and global risks into their allocation criteria of conces-sional flows. By implication, the weight of PBA and the reliance on policy and governance assessment (through the CPIA) would need to shrink. Donors have been reluc-tant to change so far, despite criticism and long debate:

the PBA gives high weight to policy and governance as-sessment (through CPIA) and ignores the vulnerability or distance of poor countries from development goals such as the MDGs. Inclusion of policy-independent, structural indicators into the allocation mechanism would make multilateral concessional finance more transparent, sta-ble, predictasta-ble, and less procyclical.

Assessing vulnerability which is independent of present policy is needed both to identify the most vulnerable poor countries and to design criteria for the allocation of international resources. Two kinds of vulnerability and the corresponding indices, which have recently been used for allocation of EU development funds, can be considered:

– Structural economic vulnerability (as measured by the UN Economic Vulnerability Index, EVI), the UN index thought to replace the non-transparent performance index CPIA. EVI is a composite consisting of 50 per-cent “exposure” (size, location, agricultural share) and 50 percent “shock intensity” (both natural and trade)²⁸. – Physical Vulnerability to Climate Change Index

(PVCCI), an indicator developed by Patrick

Guillaumont (2011) at the Fondation pour les Études et Recherches sur le Développement International (FERDI). PVCCI consists of 50 percent “risks related to progressive shocks” (flooding due to sea level rise;

increasing aridity) and 50 percent “risks related to the intensification of recurrent shocks” (rainfall;

temperature)²⁹.

EVI would be used for the allocation of development as-sistance, PVCCI for the allocation of adaptation resourc-es. As scope and time horizons differ for ordinary poverty reduction relative to climate change adaption, a separate climate window ruled by PVCCI should be pursued.

Poverty-related allocation of concessional finance should gradually move away from PBA, especially to the extent that the focus is on fragile least developed countries.

28 A detailed presentation of EVI can be found in Guillaumont (2011).

29 For detail, see Guillaumont and Simonet (2011).

IDA (2013) has proposed that transitional support be lower, set at two-thirds of the allocation the country would have received had it remained an IDA borrower.

The terms of assistance for the transitional support would be harder than those of IDA hard term lending but below the fixed rate equivalent of an IBRD loan. The use of transitional support from IDA is expected to be aimed at tackling a country’s poverty agenda as specified in its country assistance strategy. Funds from the transitional window could be earmarked only for poor regions or specific poverty-relevant sectors of the eligible countries.

Kanbur (2012) has suggested that regional per capita in-come²⁷ could be used to target projects within a country.

As alluded to in chapter 4.2, access of UMIC to transi-tional windows might be related to project types and a country’s tax effort progress. Special allocations would thereby be provided for social redistribution projects or the provision of GPGs. Only those regions that have not crossed the basic IDA threshold would be eligible. In India, for example, the poorest states would continue to have access to IDA until India’s per capita GNI exceeded twice the IDA threshold.

As for the PBA mechanism (still based on the CPIA), the poverty focus of IDA allocation (in both the standard and the transitional window) would be enhanced by focusing the performance indicators directly on poverty reduc-tion outcomes. Kanbur (2005) has suggested a gradualist approach to PBA reform: leaving the current IDA alloca-tion methodology essentially intact, but to introduce one new outcome indicator to the scoring in the CPIA, which should evaluate the evolution of an actual development outcome variable up to the present. Post-2015 develop-ment goals, and still more importantly poverty eradica-tion, would be the appropriate candidates.

CPIA critics have repeatedly called for significant modi-fication or wholesale overhaul (Arndt and Oman, 2006).

The CPIA lacks transparency and comparability over time, suffers from selection bias, and is not well suited to help developing countries identify how to improve the quality of local governance effectively. Users – mainly people located outside developing countries – thus, tend to use, and widely misuse, these indicators to compare the quality of governance both among countries and over time. PBA is particularly ineffective in fragile states;

as IDA’s client base becomes increasingly fragile and post conflict, the need to establish a new allocation mecha-nism will become more urgent.

27 This requires reliable and transparent data on subnational ac-counts.

of labor and comparative advantages. If by 2025 IDA´s client base would have turned almost entirely African, both IDA and AfDB shareholders will have to reconsider their division of labor in order to avoid redundancies and costly overlaps to donor budgets and recipient adminis-trative capacities. Although competition between the two institutions is healthy and greater collaboration would be constructive, a clearer division of labor is needed. The AfDB (2013)views its comparative advantage especially in infrastructure development; other core operational priorities highlighted include private sector develop-ment, regional integration, governance, and skills devel-opment³⁰.

The composition of financial flows to Africa has changed dramatically, with foreign direct investment now ex-ceeding ODA in several countries. Emerging donors, especially, but not only China, now account for a signifi-cant portion of financing flows to the region, being the largest sources of development finance in some African countries. Arguably, emerging partners have greater de facto voice in the AfDB than in any other multilateral soft window considered here. The AfDB has signed vari-ous memorandums of understanding with a number of emerging-country institutions to foster Africa’s devel-opment, particularly in the areas of infrastructure and the private sector. Emerging partners, as a result of own rapid infrastructure development, have a comparative advantage in implementing transport infrastructure in particular. This specific partnership combination pro-vides considerable credibility to the presumption that the AfDB would have a comparative advantage relative even to IDA in the infrastructure sector. Other “natural candidates” for AfDB comparative advantages are the provision of regional public goods, for example to fa-cilitate intra-African trade through regional integration.

Correspondingly, IDA should downsize these areas for its lending activities in Africa while concentrating more on climate change-related finance.

There has been a rationale to strengthen an allocation system specific to the AfDF that should reflect country performance and capacity related to the AfDF´s core mission (e.g., infrastructure and regional integration).

Specifically, structural indicators needed be added in AfDF-13 to address infrastructure-related regulatory capacity, maintenance performance, and indicators to capture regional integration issues. Certain development outcome indicators, either treated as components or re-30 For its work on each of the five core operational priorities, the

AfDB intends to emphasize the areas fragile states, agriculture and food security, and gender. The latter seems a perfect fit for Africa´s specific needs.