Public Disclosure Authorized
78631
FROM: The President
Public Disclosure Authorized
Public Disclosure Authorized
June 12, 2013
MEMORANDUM TO THE EXECUTIVE DIRECTORS
IDA Commitment Charge for FY14
I.
1.
IDA's policy is to maintain its service and commitment charges at a level that will cover
its allocated administrative expenses. While IDA's service charge is fixed at 75 basis points of
the disbursed and outstanding balance of IDA credits, IDA's commitment charge is variable and
set between 0 and 50 basis points of the undisbursed balance ofiDA credits and grants in order
to respond to changing administrative expenses. The commitment charge is set annually by the
Executive Directors, and IDA advises its borrowers on the level before the start of each fiscal
year. For FYI3, IDA's commitment charge was set at zero on credits and grants. 1
2.
This memorandum reviews IDA's currently projected service and commitment charge
income for FYI3; outlines the components ofthe calculated net surplus or shortfall that forms
the basis for the recommended level of the commitment charge for FY14; and prov_ides an
outlook for the IDA commitment charge in FY15 and FY16.
II.
Public Disclosure Authorized
Introduction
Projected Income from FY13 Service and Commitment Charges
3.
IDA's commitment charge is set annually at a level to cover any projected shortfall
in charge income versus administrative expenses. IDA's charge income includes (i) service
charges on disbursed and outstanding balances of IDA credits; (ii) donor financing of forgone
service charges on credits cancelled due to debt relief provided by IDA under the Heavily
Indebted Poor Country (HIPC) Initiative and the Multilateral Debt Relief Initiative (MDRI);2 (iii)
donor financing of forgone service charges on IDA13 grants;3 and (iv) the interest income on
2
Annex A shows the historic levels of IDA commitment charges.
IDA is forgoing credit reflows due to debt relief provided under the HIPC Debt Initiative and the Multilateral
Debt Relief Initiative (MDRI), over four decades. Delivery of HIPC debt relief is projected to continue over the
next 20 years, whereas delivery ofMDRI debt relief, which has started in FY07, will continue through FY44.
IDA's donors have committed to replace the forgone credit reflows due to HIPC on a pay-as-you-go basis and
those due to MDRI on a dollar-for-dollar basis- covering both principal repayments and forgone charge income
- overtime.
"Modalities ofiDAI3 Grant Financing: Technical Note", IDNSecM2004-0379, May26, 2004.
- 2IDA's hard-term credits, which finances the forgone service charges on IDA grants extended
under IDA14 and subsequent replenislunents (see Annex B for details about financing of forgone
charges due to IDA's provision of grants).4 The share and volume of the Bank's annual
administrative expenses allocated to IDA are determined through the IBRD/IDA cost attribution
methodology, which was last reviewed by the Executive Directors on May 20, 2008. 5 Table I
compares IDA's projected charge income and its allocated administrative expenses for FY13 and
FYI4-16.6
.
Table 1: IDA Commitment Charge, FY13 (estimated) and FY14-16 (projected)
(in US$ million)
Total charge income to cover administrative e~penses:
Service charges on credits
Forgone service charges due to HIPC/MDRI relief,
financed by donors
Forgone charges on IDA13 grants, financed by donors
Forgone charges on IDA14, IDAlS and IDA16 grants,
financed by interest income on hard-term credits
Total funds available
Less: lOA administrative expenses
Net surplus
Commitment charge level In basis points
I
II
Ill
June 2012 Est
Current Est
Change
FY13
FYU
111·11
929
1,023
241
39
240
39
22
1,231
22
1,323
(1,224)
!1.2531
7
70
Projection
FY14
Projection
FY15
Projection
FY16
94
967
1,031
1,095
(1)
(0)
236
38
231
37
222
37
(0
92
30
1,270
36
1,335
42
1,396
(29)
(1,2621
(1,293)
(1.326)
9
42
70
0 bps
Obps
Obps
63
Obps
Notes:
SDR amounts ore translated into US$ using the effective exchange rote used to hedge IDA's administrative expense.
4.
Updated FY13 projections confirm that IDA's charge income will cover its share of
administrative expenses without the need for additional income from levying a
commitment charge. At the last review in June 2012, projections for FY 13 indicated that total
charge income would cover administrative expenses by a surplus of US$7 million. The
commitment charge was therefore set at zero (see Table 1). Updated estimates project a surplus
of US$70 million. The increase from the initially projected surplus is caused by an increase in
service charges on credits, due to arrears clearance by Myanmar in January 2013 and due to the
favorable movement in foreign exchange rates used to convert the SDR service charge income
into US$ equivalent. This increase is offset in part by IDA's share ofFY13 administrative
expenses, which were US$29 million higher than projected in June 2012.
"Additions to IDA Resources: Fourteenth Replenishment", IDA/R2005-0029, March I, 2005.
6
"IBRD/IDA Shares of Administrative Expenses- Revision of Methodology", R2008-008l and IDAIR20080088, April 21, 2008.
Projections of service charge income for May and June of FY 13 are provided by the Financial Reporting and
Analysis group of the Vice President and Controller (CTRFA) and adjusted to reflect IDA's effective hedged
exchange rate. For FY 14, FY 15 and FY 16 projected service charge income is estimated by the IDA Resources
Mobilization team of the Concessional Finance and Global Partnerships Vice Presidency (CFPIR) based on the
projections of the commitments and disbursements provided by the Operations Policy and Quality Department
(OPSPQ). Projected administrative expenses for the whole period to FY 16 are provided by the Corporate
Planning and Analysis group (CFRPA). Projections are provided for illustrative purposes only and subject to
revisions as estimated inputs, such as commitment and disbursement volumes or exchange rates, are revised.
-3-
lli.
IDA Commitment Charge for FY14
5.
FY14 projections for charge income and administrative expenses indicate that IDA
will cover its share of administrative expenses without the need for a commitment charge.
•
For FY14, IDA's charge income is currently projected at US$1,270 million. This
income is expected to come from the following four sources: (i) US$967 million in
projected service charge income on credits; (ii) US$236 million in donor
contributions to compensate for forgone service charge income due to HIPC and
MDRJ debt relief; (iii) US$38 million from IDA14 donor contributions to finance
forgone service and commitment charge income for IDA13 grants; and (iv) US$30
million from interest income on hard-term credits to cover forgone service and
commitment charge income from IDA14, IDA15, and IDAI6 grants.
•
The volume of administrative expenses allocated to IDA during FY14 is
currently projected at US$1,262 million. This would result in a projected surplus
of charge income over allocated administrative expenses ofUS$9 million. Any final,
actual surplus for FY14 would be made available to IDA client countries as additional
funding for future credit and grant commitments.
6.
Based on current projections of IDA's charge income and administrative expenses,
IDA would not require any income from commitment charges on either credits or grants
for FY14. Therefore, management recommends keeping the commitment charge on both IDA
credits and grants at zero in FY14.
IV.
Outlook for FYlS and FY16
7.
Based on current projections for IDA's charge income and administrative expenses,
the commitment charge on IDA credits could remain at zero for FYlS and FY16. This
estimate is subject to revision based on changes to projections for IDA's charge income and
allocated administrative expenses, which depend on a variety of parameters, including the pace
ofiDA's commitments and disbursements, the Bank's cost of operations in IDA countries, and
the effective exchange rate used to hedge IDA's administrative expenses. 7
8.
As in past years, Management will report back to the Executive Directors annually to
review IDA's net charge income and will keep the Executive Directors informed, as appropriate,
should there be any material changes.
Within IDA's overall currency risk management framework, administrative expenses are hedged on a rolling
quarterly basis, where I 00 percent of the projected administrative expenses for the next twelve month are
hedged, 66 percent of the projected administrative expenses for the following twelve month (months 13- 24)
are hedged, and 33 percent of the administrative expenses for the nel{t twelve months (months 25- 36) are
hedged. The impact of exchange rates is, therefore, smoothed over a 3 year period, lowering year-to-year
volatility in projected administrative expenses.
-4~
v.
Reeommert,datin
:PorFY14~ lDAis plt)je¢ted jo coveri~s all~~~ oftb.eilanlf~s~ve·
expenges without the need for·~ditiooal in0ome frOtnl~a eonnnitment~l1atge; lhetefoi:C,
Managem~t ~~ihattb.ecommibl:letl.t cli~ge for FY14 be~ at ~o fotall
o~gandnew IDA credits:andgrants;
9. .
Jhn Yong K.hn
~4efit
by Bertrand Badre
Managing Director, Finance and
WBG Chief Financial Officer
- 5AnnexA
History of IDA Commitment Charges
(in basis points)
Commitment
Commitment
charge on
charge on
credits (bps)
grants (bps)
FY82- 88
so
FY89- 02
0
0
N/A
N/A
Fiscal year
FY03
FY04
so
0
0
FYOS
3S
0
FYOG
30
0
FY07
20
0
FY08
10
0
FY09
0
0
FYlO
0
0
FYll
0
0
FY12
0
0
0
0
FY13
- 6-
AnnexB
Financing of Forgone Charges due to IDA's Provision of Grants
Financing of forgone charges due to IDA's provision of grants will continue through the
approach agreed during the IDA14 replenishment. The agreed approach for financing
forgone charges due to IDA grants is as follows:
•
For IDA13 grants, donors agreed to contribute an additional SDR 470 million8 in IDA14 to
finance forgone charge income on grants made during the IDA13 period. In addition, they
agreed to finance forgone principal repayments on a pay-as-you-go basis during future
replenishments, starting in FY13. Due to the 10-year grace period on regular IDA credits,
IDA16 is the first replenishment for financing principal reflows forgone due to grants
extended in IDA13. Of the total principal reflows forgone in the FY12 - 14 period ofSDR
60 million, donors provided compensatory financing for 94 percent at SDR 56 million.
•
For grants provided under IDA14 and subsequent replenishments, IDA's forgone charges
are financed through the charges-related portion of the volume discount applied to country
allocations of grant recipients. 9 Resources from this component of the volume discount are
made available to eligible countries under IDA's 'hard-term' lending window established
in IDA14. Interest income from that window is applied toward covering IDA's
administrative expenses. Originally, eligibility was restricted to IBRD creditworthy blend
countries with per capita incomes below the IDA operational cut-off and an active IBRD
lending program. However, in IDA 16 eligibility is extended to all blend countries.
Lending terms for hard-term credits approved during IDA14 and IDA15 include a 35-year
maturity and a 10-year grace period, whereas terms for hard-term credits approved during
IDA16 include a 25-year maturity and a 5-year grace period. 10 In addition to IDA service
and commitment charges, an interest charge is applicable. 11
9
10
11
Equivalent to the present value of forgone charges over 40 years.
"Additions to IDA Resources: Fourteenth Replenishment", IDNR2005-0029, March I, 2005, paragraphs 7782. Forgone charges on grants are assumed to be at the same level as projected charges on IDA credits (service
charge and commitment charge). This ensures that grant recipients are charged at an equivalent amount as
credit recipients. The total volume discount on grant allocations is set at 20 percent (except for post-conflict
countries). Thirteen percent is reallocated through IDA's performance-based allocation system and 7 percent
(the charges-related portion of the volume discount) is made available to eligible countries under IDA's hardterm lending window. (The charges-related portion of the volume discount on IDA 14 grant allocations was
originally 9 percent, based on the level of charges in IDA 14. However, the reduction of the IDA commitment
charge for credits to zero in FY091owered the charges-related portion ofthe volume discount on IDA IS grants
from 9 percent to 7 percent).
"Additions to IDA Resources: Sixteenth Replenishment", IDA/SecM2011-0219, March 22,2011, paragraph 98.
The interest rate is set for each fiscal year and is derived from the fixed -rate equivalent of IBRD's lending rate
reduced by 200 basis points. For FY13, the interest rate on IDA's hard-term loans is 1.5 percent.