IDA S Implementation of the Multilateral Debt Relief Initiative

Transcription

1 IDA S Implementation of the Multilateral Debt Relief Initiative Resource Mobilization Department, FRM March 14,26

2 ABBREVIATIONS AND ACRONYMS AfDF CAS CP CPAR DOD DP DSA DSF ES W HIPC IBRD IDA IF1 IMF IOC MDGs MDRI ODA OPCS -FM PEM PER PFM PREM PRGF PRS SDR African Development Fund Country Assistance Strategy Completion Point Country Procurement Assessment Report Debt Outstanding and Disbursed Decision Point Debt Sustainability Analysis Debt Sustainability Framework Economic and Sector Work Heavily Indebted Poor Country International Bank for Reconstruction and Development International Development Association International Financial Institution International Monetary Fund Instrument of Commitment Millennium Development Goals Multilateral Debt Relief Initiative Official Development Assistance Operations Policy and Country Services - Financial Management Public Expenditure Management Public Expenditure Review Public Financial Management Poverty Reduction and Economic Management Network Poverty Reduction and Growth Facility Poverty Reduction Strategy Special Drawing Rights

3 Table of Contents. INTRODUCTION KEY FEATURES OF THE MULTILATERAL DEBT RELIEF INITIATIVE... 2 I I1 I11. IMPLEMENTATION MODALITIES OF THE DEBT CANCELLATION... 3 A. B. C. D. E. F. G. H. Key Dates of Debt Relief... 3 Credit and Country Coverage... 4 Expected Time Profile and Currency of Denomination... 5 Accounting Treatment in IDA... 6 Confirming Country Eligibility... 6 Monitoring Fiscal Management in MDRI Recipient Countries... 7 Projected Impact of the MDRI on New IDA Allocations... 8 Post-Debt Relief Borrowing and Free Riding Concerns... 1 IV. FINANCING ARRANGEMENTS... 1 A. The IDA Deputies Report... 1 B. Indicative Donor Pledges Received C. Impact on IDA s Commitment Authority D. Monitoring of Donor Financing Over Time E. Implementation Costs V. LEGAL CONSIDERATIONS FOR DEBT CANCELLATION VI. RECOMMENDATIONS LIST OF TABLES Table A: Table B: ANNEXES Compensation Schedule for IDA Donors Summary of Indicative Donor Pledges... : Annex 1: Data Tables Annex 1.1 Estimated Costs to IDA under the MDRI Annex 1.2 Estimated MDRI Debt Relief by IDA Country... i Annex 1.3 MDRI Impact on IDA Country Allocations: Base Case, no Graduations Annex 1.4 MDRI Impact on IDA Country Allocations: Graduation Scenario... 2 Annex 1.5 Projected Total IDA Assistance Flows (New IDA Commitments Plus Forgone Reflows: Using Base Case Assumptions Annex 2: Memorandum of the General Counsel Annex 3: Decision of the Executive Directors under Article X of the Articles of Agreement Regarding Article V, Section 3 of the Articles of Agreement ATTACHMENT 1: IDA Deputies Report: Additions to IDA Resources: Financing the Multilateral Debt Relief Initiative. Washington DC. March 1. 26

4 IDA s Implementation of the Multilateral Debt Relief Initiative I. INTRODUCTION 1. The G8 countries have proposed to augment debt relief to Heavily Indebted Poor Countries (HIPCs) that have reached their HIPC completion point, leading to 1 percent cancellation of debt owed by them to IDA, the IMF, and the African Development Fund (AfDF), while providing dollar-for-dollar compensation to IDA and AfDF so as to safeguard their long-term financial capacity. This initiative was proposed by the G8 Finance Ministers at their meeting in London on June 1-1 1,25, and reaffirmed by G8 Heads of State at the Gleneagles Summit on July 8, 25. G8 Finance Ministers provided further details of their specific financing commitments under this proposal in their letter to the President of the World Bank dated September 23, On September 25,25, the Development Committee welcomed the Multilateral Debt Relief Initiative (MDRI). It asked the Bank to prepare a compensation schedule and monitoring system of all donor contributions, and to proceed with the steps to ensure all necessary arrangements for implementati~n.~ IDA S Executive Directors held various informal meetings on the MDRI, including on July 5, 25, August 4,25, September 8,25, September 2,25, November 29,25, and December 15, On March 1,26, the IDA Deputies issued a report (the Deputies Report ) welcoming the MDRI and providing details of donors financing commitments to cover IDA s costs under the MDRI through a replenishment of IDA s resource^.^ The Deputies Report was prepared following consultations with Deputies and meetings held on September 11, 25 and on December 6-7, 25 and i s attached to this paper as Attachment 1. Deputies conclude that debt cancellation under the MDRI, appropriately financed, would enhance IDA s contribution to development, and they recommend that IDA proceed with the debt cancellation on the basis of full financing of IDA s debt relief costs over time. On this basis, Deputies propose that IDA s Executive Directors recommend to the Board of Governors the adoption of the draft Resolution to increase IDA s resources, attached to the Deputies Report. The proposal is set out in the G8 Finance Ministers Communiqui entitled Conclusions on Development, London, June 11,25. A technical note was subsequently prepared by G8 debt experts: Technical Note: G8 Proposal for HIPC Debt Cancellation, Washington DC, July 14,25. Letter to the President of the World Bank from the G8 Finance Ministers on the G8 Debt Proposal, Washington, DC, September 23,25. Development Committee Communiqui, para. 5, Washington, DC, September 25,25. The following papers were prepared by staff for these discussions: The G8 Debt Relief Proposal: Preliminary Costs and Issues, IDNSecM25-414, July 28,25; The G8 Debt Relief Proposal: Assessment of Costs, Implementation Issues, and Financing Options, IDNSecM25-466, September 6,25; and The Multilateral Debt Relief Initiative: Implementation Modalities for IDA, IDNSecM25-592, November 18, 25. Additions to IDA Resources: Financing the Multilateral Debt Relief Initiative, Washington DC, March 1, 26.

5 -2-4. This paper recommends that the Executive Directors authorize IDA'S implementation of the MDRI, under the modalities proposed for debt cancellation by IDA. The paper sets out the proposed modalities for debt cancellation by IDA and summarizes the financing arrangements to compensate IDA for its forgone reflows under MDRI. Management recommends that IDA participate in the MDRI and that the Executive Directors take the following three steps: (i) decide on an interpretation of IDA'S Articles to permit total debt cancellation for eligible countries (a legal memorandum of the General Counsel, supporting that recommendation, is attached at Annex 2 (the "Legal Memorandum"), and the text of the recommended decision of Executive Directors is attached at Annex 3); (ii) approve the proposed debt cancellation and the detailed implementation modalities described in this paper; and (iii) approve the Report of the IDA Deputies "Additions to IDA Resources: Financing the Multilateral Debt Relief Initiative" and transmit the Report and accompanying Resolution to the Board of Governors for adoption. 5. The paper is structured as follows. Section I1 summarizes the key features of the MDRI. Section I11 provides details on the proposed implementation modalities for debt cancellation by IDA. Section IV summarizes the financial compensation arrangements by the IDA donors which are described in the Deputies' Report at Attachment 1 to this paper. Section V summarizes the conclusions of the Legal Memorandum of the General Counsel accompanying this paper. Section VI provides recommendations for approval by the Executive Directors. 11. KEY FEATURES OF THE MULTILATERAL DEBT RELIEF INITIATIVE 6. The objective of the MDRI is to provide additional support to HIPCs to reach the MDGs while ensuring that the financing capacity of the IFIs is preserved. The MDRI provides a framework that commits to achieve two objectives: deepening debt relief to HIPCs while safeguarding the long-term financial capacity of IDA and the AfDF; and encouraging the best use of additional donor resources for development by allocating them to low income countries on the basis of policy performance. Debt relief to be provided under the MDRI will be in addition to existing debt relief commitments by IDA and other creditors under the Enhanced HIPC Debt Initiative. 7. The MDRI calls for 1 percent cancellation of IDA, AfDF and the International Monetary Fund (IMF) debt for countries that reach the HIPC completion point6 Eighteen completion point HIPCs would benefit from debt relief upon confirmation of eligibility; the remaining 1 interim and 1 pre-decision point HIPCs would become eligible once they reach completion point. Eight further countries may qualify for the HIPC Initiative under the sunset clause extension. Four of these would become eligible under the MDRI once they reach their completion points, while the MDRI eligibility of the other four countries would be considered in the future (see Section 1II.A for details). 8. The MDRI commits to providing additional resources, to ensure that the financing capacity of the IFIs is preserved. The Development Committee stressed the need for "an interdependent package consisting especially of dollar for dollar compensation for IDA that is The MDRI does not currently cover debts owed to the IBRD, the African Development Bank, or other MDBs such as the Inter-American Development Bank, although donor discussions are ongoing whether selected MDBs will join. Differently from the HIPC Initiative, the MDRI does not include debt relief by any bilateral and commercial creditors.

6 -5- truly additional to existing commitments and that maintains the financial integrity and capacity of IDA to assist poor countries in the future. It called for donor burden sharing on a voluntary basis to provide these benefits. In their letter dated September 23, 25, G-8 governments reaffirmed their commitment to the long-term role of IDA in the international development architecture and in financing development, and noted that in doing so we recognise that IDA will utilise a contribution baseline of the real value of donor contributions under IDA14 as a means of assessing additionality. The IDA Deputies confirmed their commitment to providing such additional financing resources in their Report of March 1, The MDRI will affect IDA s assistance flows to IDA countries in two ways. First, the annual amount of debt relief provided to countries eligible under the Initiative will be deducted from their annual IDA allocations. This feature helps allay moral hazard and equity concerns associated with debt cancellation. Second, the additional resources provided by donors to finance the debt relief provided by IDA wili be allocated to countries according to IDA s performance-based allocation (PBA) system (see Section 111. G for details). This feature helps maintain the link between IDA resource transfers and country performance. 1. The MDRI will give beneficiary countries an opportunity to reduce debt payments substantially and, through continued performance, secure additional resource flows to help countries attain their MDG objectives. For these benefits to be realized, the economic space opened up by debt cancellation will need to be carefully and responsibly managed, especially with respect to the future accumulation of debt. If post-relief borrowing were to take place from non-concessional sources, debt levels could soon become unsustainable again. Work is underway to address these issues (see Section 111. H for details) IMPLEMENTATION MODALITIES OF THE DEBT CANCELLATION A. Key Dates of Debt Relief 11. The cutoff date for eligible debt will be the end of calendar year 23. Therefore, debt stocks as of December 31,23 will be eligible for cancellation by IDA under the MDRI. Credit amounts that were undisbursed as of the cutoff date would not be eligible for cancellation. Furthermore, any new IDA credits approved after the cutoff date would not qualify for cancellation under the MDRI. 12. For the group of completion point (CP) HIPCs, delivery of debt relief under the MDRI is expected to start at the beginning of FY7. This assumes that all 18 HlpCs which have passed the completion point to date would have been confirmed by the Executive Directors to be eligible for debt cancellation prior to the start of FY7. For HIPCs yet to reach the completion point, delivery of debt relief under the MDRI will start at the beginning of the quarter immediately following confirmation of a country s eligibility by the Executive Directors. 13. Debt cancellation will take place at the start of FY7, subject to the effectiveness of the increase in IDA s resources to finance IDA s costs under the MDRL7 The target date for effectiveness of the increase in resources is May 31,26. The effectiveness threshold for the increase in IDA s resources is described in Section IV. C of the IDA Deputies Report related to the MDRI. See also Section 1V.A in this paper.

7 Debt relief under the MDRI will cover all remaining debt service obligations on eligible IDA credits, through the end of their maturity. Following the practice under the HIPC Initiative, IDA would provide debt forgiveness under the MDRI by irrevocably canceling the borrower s payment obligations under the eligible credits, without affecting the other provisions of the credit agreements concerned. Debt relief will be provided for all principal repayments and credit charges* payable to IDA, after any debt service relief available under the Enhanced HIPC Initiative. As set out above, debt relief will start at the beginning of the fiscal year following confirmation of country eligibility by the Executive Directors. Debt service payments made by a HIPC country between the cutoff date of December 3 1,23 and the country s debt cancellation start date will not be covered under the MDRI. B. Credit and Country Coverage 15. Credit coverage under the MDRI will be defined as the stock of eligible debt based on debt outstanding and disbursed (DOD) as of the cutoff date.g Countries expected to become eligible under the MDRI include the 38 HIPC countries once they reach their HIPC completion points. 16. In addition, there are a further 4 potentially eligible IDA countries that may qualify as HIPCs by end-december 26 under the HIPC sunset clause. These 4 countries are Eritrea, Haiti, the Kyrgyz RepubIic and Nepal. They would also qualify for debt cancellation under the MDRI if and when they reach their HIPC completion points in the future. 17. Furthermore, there are another 4 countries where limited data availability has added uncertainty as to whether they would meet the HIPC Initiative s indebtedness criteria. These 4 countries are Bangladesh, Bhutan, Sri Lanka and Tonga. Their eligibility for future debt relief under the MDRI would be deferred until a later stage for consideration by the Executive Directors, bearing in mind the principle of an equitable approach and taking into account the availability of compensatory donor financing. 18. The estimated costs of IDA from debt cancellation, based on debt outstanding and disbursed as of December 31,23 for the 38 HIPCs plus the 4 sunset clause countries would be equivalent to about USD 37 billion (SDR 24.8 billion). Annex 1.1 provides more detailed cost estimates for IDA in SDR terms, by group of HIPC countries and by fiscal year. Annex 1.2 shows the expected volume of debt relief by IDA country. Charges account for about 9 percent of total estimated debt relief costs. Forgone credit charges of IDA would only comprise service charge payments (.75 percent per year on the disbursed and outstanding credit balance). IDA commitment charges (which vary between and.5 percent per year) would not be forgone since commitment charges are payable on the undisbursed credit balances. This is the approach adopted for the HIPC Initiative, where debt relief is calculated using disbursed and outstanding balances as of a specific cutoff date. In April 26, the Executive Directors of IDA are expected to consider a staff report on the final list of countries potentially eligible for assistance under the HIPC Initiative. MDRI cost estimates will be adjusted after the Executive Directors have decided on the final list of HIPC-eligible countries. The applicable foreign exchange rate is USD/SDR , the daily average exchange rate over the period April 1 to September 3,25. The cost estimates for IDA do not include amounts overdue from pre-decision point HIPCs since any arrears would have been cleared by the time these countries reach their HIPC completion point and become eligible for MDRI debt relief.

8 -5- C. Expected Time Profile and Currency of Denomination 19. Cost estimates for IDA depend on the projected time profile for HIPCs to reach their completion points and become eligible for debt cancellation under the MDRI. During the remainder of the IDA14 period (FY7-FY8), it is currently estimated that 26 countries will benefit from debt cancellation under the Initiative. This includes all the 18 completion point HIPCs (which are assumed to benefit from debt relief as of July 1, 26) plus 8 of the 1 decision point countries (which are projected to benefit from debt relief during the third year of the IDA14 period).12 Cost estimates also assume that during the IDA15 period (FYOg-FYll), 36 of the current HIPCs plus Eritrea, Haiti, the Kyrgyz Republic and Nepal would benefit from MDRI debt relief.13 By IDA16, all HIPCs are assumed to receive debt relief under the Initiative. 2. The preponderance of forgone credit reflows of IDA due to debt cancellation under the MDRI are denominated in SDRs. However, current debt relief under the Enhanced HIPC Initiative is fixed in USD terms and, therefore, the volume of remaining debt relief to be provided under the MDRI will fluctuate in SDR terms, until HIPC debt relief expires over about 2 years from the country s decision point. In addition, until 198, IDA credits were denominated in USD; as a result, nearly 1 percent of forgone credit reflows due to the Initiative will be denominated in USD, rather than SDRs. These two foreign exchange rate issues will be addressed in the following manner: (a) SDR-denominated IDA credits. Debt relief under the MDRI is estimated as 1 percent of SDR-based debt service minus USD-based debt relief under the Enhanced HIPC Initiative. HIPC debt relief is converted into SDR equivalent amounts as follows: (i) for costs during FY7 and FY8, by applying the foreign exchange rates resultin from the hedging of donor contributions to cover HIPC costs during El IDA14; and (ii) for costsfrorn FY9 onwards, by applying the foreign exchange reference rates agreed by donors under the latest regular IDA replenishment. For current cost estimates, the foreign exchange reference rates (from April 1 through September 3,25) agreed by IDA S donors for MDRI compensation apply. (b) USD-denominated IDA credits. Debt relief under the MDRI is estimated as 1 percent of USD-based debt service minus USD-based debt relief under the Enhanced HIPC Initiative. The resulting MDRI debt relief amounts are converted into SDR equivalent amounts by applying the foreign exchange reference rates agreed by donors under the latest regular IDA replenishment. For current cost estimates, the agreed foreign exchange reference rates (from April 1 through September 3,25) for MDRI compensation apply. These 8 decision point HIPCs include: Burundi, Cameroon, Chad, Democratic Republic of Congo, Guinea, Malawi, Sierra Leone, and Sao Tome & Principe. l3 Only two pre-decision point HIPCs are currently estimated to become eligible for MDRI debt relief by FY 12, at the beginning of the IDA16 period: Myanmar and Togo. l4 IDA hedged the foreign exposure resulting from IDA14 donor contributions in early May 25, following adoption of the IDA14 Resolution by IDA S Board of Governors, at an exchange rate of USDISDR

9 Following the procedures currently used under the Enhanced HIPC Initiative, IDA s costs under the MDRI will be updated periodically. Cost updates will factor in new available information on the number and timing of HIPC countries becoming eligible for debt cancellation. Updates will also take account of revised volumes of debt relief to be provided under the Enhanced HIPC Initiative. Furthermore, the valuation of USD-based HIPC debt relief and of reflows on USD-based credits of IDA will change over time, depending on the foreign exchange reference rates to be agreed by donors every 3 years to coincide with future IDA replenishments. D. Accounting Treatment in IDA 22. Debt relief under the MDRI will have an important impact on IDA s financial statements and its reported resources.15 Upon approval of IDA S debt cancellation under the MDRI by the Executive Directors, IDA would provide on its balance sheet for the full amount of the expected cancellations of the appropriate credits for the 38 HIPC countries. Loan loss provisions for the 4 HIPC sunset clause countries would be added once reliable cost estimates become available. The aggregate reduction of IDA S resources relating to the 42 countries is estimated at about 25 percent of total reported resources as of end-june, 25. Loan loss provisions would be replaced by credit write-offs at the implementation date when each cancellation becomes effective. Over time, as firm compensatory financing is received from the donors, the reduction of IDA S resources resulting from the MDRI would be gradually reversed. E. Confirming Country Eligibility 23. The MDRI can be interpreted as an extension as well as a deepening of the HIPC Debt Relief Initiative. Consistent with this view, the process of reaching HIPC completion point will provide adequate conditionality, including on governance, accountability and transparency. However, the 18 post-completion point countries, which are expected to become immediately eligible for debt relief under the MDRI, will be required to maintain reasonable governance standards. Since the Initiative provides full upfront debt stock cancellation, only a one-time assessment is required For IDA, AfDF and the IMF, the criteria used to confirm eligibility for debt relief under the MDRI follow the HIPC completion point criteria. These include: (i) satisfactory macro-economic performance under an IMF poverty reduction and growth facility (PRGF) program or equivalent; (ii) satisfactory progress in implementing a poverty reduction strategy (PRS); and (iii) the existence of a public expenditure management (PEM) system that meets minimum standards for governance and transparency in the use of public resources. Countries will need to meet all three criteria in order to be eligible for debt relief under the MDRI. 25. Country assessments have already been prepared collaboratively by Bank and IMF staff to certify eligibility of 2 countries for MDRI debt relief delivered by the I MF.17 The l5 l6 l7 For details on the estimated accounting impact, refer to Annex 2.4. in The Multilateral Debt Relief Initiative: Implementation Modalities for IDA, IDAL3ecM25-592, November 18,25. In the event that a country i s not considered eligible, a re-assessment may be needed in the future to confirm eligibility. Refer to IMF EBS 5/174 MDRI - A First Assessment of Eligible Countries, and for individual country assessments refer to IMF EBS

10 -7- IMF Board discussed these assessments at a meeting on December 21,25 and agreed to provide debt cancellation under the MDRI to 19 eligible countries, with one country requiring remedial actions before IMF debt relief could be committed. Bank management expects to present the assessments to IDA S Executive Directors for approval in April 26, updating them as required to reflect the latest developments on the criteria being examined. For countries that do not qualify for debt relief under the MDRI on the basis of these assessments, a set of remedial measures would be identified. Upon their implementation by the country, all three criteria would be re-assessed to determine eligibility for debt relief. 26. Countries are also expected to be current on repayment obligations to IDA and in compliance with existing IDA reporting requirements on external borrowing. Consistent with IDA S existing policies in making any financial assistance available to recipients, eligible countries would have to be up to date in their reporting obligations to IDA on external indebtedness. F. Monitoring Fiscal Management in MDRI Recipient Countries 27. Strong public financial management (PFM) systems are essential to realize the benefits of debt relief. Adequate performance standards in the areas of governance, transparency, and public expenditure management are critical to ensure that savings from debt relief are used for development. This is particularly important in the context of irrevocable, upfront debt stock cancellation - broadly equivalent to 4 years of unconditional budget support. 28. Management has recently put in place measures to strengthen the monitoring framework for countries PFM performance and to provide them with policy advice to improve budgetary and fiduciary systems. The monitoring framework is based on three pillars: (i) a structured measurement framework for assessing countries PFM performance, which incorporates a new set of 28 separate indicators; (ii) a country-specific approach towards strengthening PFM performance, facilitating borrower leadership in setting and managing a PFM reform program; and (iii) donor coordination in support of implementing the country PFM reform strategy. These pillars are derived from Bank-wide lesson learning on effective and sustained PFM reforms. Within the Bank, an integrated approach towards PFM work is being advanced, recognizing and capitalizing on the inter-linkages between the development and fiduciary aspects of financial management, and bringing together PREM with OPCS-FM and Procurement. 29. The frequency of PFM assessments will be driven by country-specific features such as: (i) perceived risk at the country level; (ii) volume and type of lending; (iii) rate of change in PFM systems; and (iv) requests by client governments. In principle, PFM assessments will be carried out every 3-5 years, as country PFM systems generally do not change rapidly. As the Bank transitions from economic and sector work (ESW) to a knowledge-based mandate for its active borrowers, more of the standardized PFM performance reports would be expected, along with more programmatic ESW spanning several years and supporting capacity- * The General Conditions applicable to IDA credits and grants provide for an ongoing obligation on the part of recipients to furnish to IDA all such information as IDA reasonably requests on the financial and economic conditions in its territory, including its balance of payments and its external debt. The Bank s OP14.1 ( External Debt Reporting and Financial Statements ) provides that, in fulfilling this obligation, countries are required to report on their public or publicly-guaranteed, as well as private non-guaranteed, external debt on a quarterly basis and to provide an annual summary report.

11 -8- building. In the interim, established ESW products (e.g., Public Expenditure Reviews and Country Financial Accountability Assessments) will continue to address public financial management issues, employing the performance indicators and the overall approach of the strengthened PFM monitoring framework. 3. This new framework for PFM assessments will strengthen monitoring of fiscal management in MDRI recipient co~ntries. ~ The new framework has already been applied in five countries and work is ongoing in 58 further countries, including many of the expected MDRI beneficiary countries. Most of the 18 post-completion point HIPCs have planned or ongoing PFM assessments using the new indicators within the next 12 months; two assessments are completed (Zambia, Ghana) and two are underway (Uganda, Mozambique). The framework emphasizes capacity-building and results on the ground, in addition to country diagnostics. Going forward, Management will monitor economic and sector work in MDRI recipients through the country assistance strategy (CAS) and other mechanisms to ensure that they continue to receive appropriate analytical attention on PFM matters. G. Projected Impact of the MDRI on New IDA Allocations 3 1, The MDRI debt relief mechanism affects new IDA allocations through a two-step process. In the first step, an eligible country s forgone debt service in any given year will be deducted from its PBA-based annual IDA allocation. In the second step, compensatory donor resources will be reallocated across all IDA-only countries (except gap countries2 ) according to their performance. Therefore, new IDA allocations on an annual basis to countries receiving debt relief would be composed of their gross PBA-based yearly allocations, minus their debt service forgone in the same year, plus their share of reallocated compensatory donor resources. 32. The long-term impact of the MDRI on new IDA allocations to eligible countries will depend on the relative magnitudes of forgone debt service and PBA-based allocations over time. Estimates of forgone debt service amounts are available based on the parameters set out in this paper. While MDRI cost estimates will be subject to regular updates, they provide a reasonable basis for estimating the long-term impact of the MDRI on country allocations. 33. Projections of future gross PBA-based allocations - from which forgone debt service will be deducted - are, however, subject to a considerable degree of uncertainty. A country s PBA-based allocation in any given year will depend on a number of factors, including: (i) its performance relative to other countries; (ii) whether it is eligible for IDA grants and, consequently, will be subjected to a volume discount; (iii) the size of IDA s overall available resource envelope; and (iv) the extent of country graduations from IDA and reverse graduations back into IDA. Many different alternative scenarios could therefore be devised, leading to diverse outcomes. l9 As part of the HIPC Initiative, progress on expenditure tracking was monitored via Assessment and Action Plans (AAPs). These plans assessed the ability of public expenditure management systems in HIPC countries to track poverty-reducing expenditures on the basis of 1.5 indicators. In April 25, the Bank and IMF replaced HIPC AAPs with the more comprehensive PFM performance measurement framework, which constitutes the first pillar of the Bank s PFM work as indicated above. In this context, gap countries are IDA-eligible countries whose per capita incomes are above IDA s operational cutoff for more than two consecutive years. 2o

12 Using a set of conservative assumptions, the level of new IDA financing commitments post-mdri is being projected over two decades (from FY7-FY26, see Annex Tables 1.3 and 1.4). The following core assumptions are used: A country's relative performance and its classification - e.g., IDA-only, post-conflict - are kept constant as of IDA14; IDA country allocations are fully committed in a given year, without frontloading or backloading of commitments across years of any one replenishment; and Grant eligibility (the "traffic lights") will change as a result of h4dri debt relief, in accordance with the first pillar of the DSF-based IDA14 grants framework In the base case scenario, two additional assumptions are introduced: Other than for changes resulting from different "traffic lights" and from the reallocation of compensatory donor resources, "gross" PBA-based allocations reflect the assumption that the overall nominal IDA envelope increases by 2 percent per annum (i.e., it remains constant in real SDR terms), consistent with the donor contribution baseline discussed in paragraph 52. This implies full donor compensation of IDA'S forgone credit reflows due to the MDRI; and There are no graduations out of IDA, nor reverse graduations back into IDA. 36. In the base case scenario, no MDRI recipient would be worse off in terms of total IDA assistance flows (new IDA commitments plus forgone debt service; see Annex Table 1.5). However, new IDA allocations could decline over time for some MDRI recipients. New IDA allocations could become negligible for a few countries,22 even after taking into account the compensatory resources received from donors (see Annex Table 1.3).23 This would reflect a progressive change in the composition of IDA flows in which debt relief would gradually become the dominant form of IDA assistance for these countries. Beyond the first two decades, this trend would gradually reverse as forgone credit reflows would decline, eventually reaching zero after 4 years. 37. The declining trend in new IDA allocations observed for some MDRI recipients could be reversed if country graduations are factored in. This graduation scenario is shown in Annex Table 1.4. Under this scenario, assumed graduations from IDA (limited in this scenario to current capped blends for simplicity) are incorporated. As before, IDA replenishments and PBA-based IDA allocations are assumed to increase by 2 percent per annum. The main implication is that countries becoming grant-ineligible are no longer subject to a grants-related volume discount on their allocations. In the base case scenario, new IDA commitments post-mdri would become negligible only for a few postcompletion point HIPCs, starting from IDA17. For the non-accrual cases, Le., countries with overdue debt service payments by 18 days or more - Central African Republic, Myanmar, Somalia and Togo - the negative post-relief allocation numbers reflect the fact that these countries are not receiving any allocations from IDA.

13 Three main implications emerge from this analysis. First, a number of HIPC countries could face moderate to high declines in their level of new IDA allocations over time as a result of the MDRI. Second, full donor compensation for IDA s forgone credit reflows under the MDRI will be required to maintain the reduced level of allocations in the base case scenario; without this, many more countries could face significant declines in their IDA allocations. And third, for these and other countries, the delivery of fresh financial resources for development will depend critically on a sustained growth of IDA s overall assistance envelope over time, based on increases in regular donor support for IDA, over and above MDRI compensation. H. Post-Debt Relief Borrowing and Free Riding Concerns 39. The amount and terms of post-relief borrowing by the recipient countries are also critical to ensure that the benefits of debt relief materialize. To the extent that debt reduction will significantly lower debt ratios of eligible countries after implementation of debt cancellation, the joint Bank-Fund debt sustainability framework (DSF) would likely signal a very low risk of debt distress. Executive Directors and IDA Deputies have expressed concern that this should not lead beneficiary countries to immediately begin re-accumulating debt levels that could become unsustainable. They were especially concerned about the free rider problem, namely the risk that fiscal and borrowing space created in recipient countries would facilitate external or domestic non-concessional borrowing. 4. Therefore, measures should be taken to mitigate the risk of a re-accumulation of unsustainable debt, particularly from non-concessional sources. The DSF does address concerns about unsustainable post-relief borrowing. However, the DSF treatment is likely to require strengthening policies aimed at curbing free riding behavior. A paper on free riding risks in the context of IDA grants has been issued on February 16, More analytical work is underway on MDRI-related free riding issues, which are qualitatively and quantitatively different from the free riding issues related to IDA grants and may thus warrant a different approach to mitigate the risk, With respect to the grant allocation system itself, Executive Directors and IDA Deputies saw the IDA14 Mid-Term Review as a good opportunity to review this system in light of the forthcoming review of the DSF, and the full debt cancellation to be provided to eligible HIPCS. A. The IDA Deputies Report IV. FINANCING ARRANGEMENTS 41. The IDA Deputies welcomed the MDRI and provided details of donors financing commitments to cover IDA s costs under the MDRI through a replenishment of IDA s resources. The Deputies Report issued on March 1,26 underlines the need for an interdependent package consisting of both MDRI debt relief and financing of IDA S forgone credit reflows. Deputies conclude that that debt cancellation under the MDRI, appropriately financed, would enhance IDA S contribution to development, and they recommend that IDA proceed with the debt cancellation on the basis of full financing of IDA S debt relief costs over time. On this basis, Deputies propose that the IDA Executive Directors recommend to the 24 IDA Countries and Non-Concessional Debt: Dealing with the Free Rider Problem in the Context of IDA Grants, IDNSecM26-53, February 16,26.

14 ~~ Board of Governors the adoption of the draft Resolution attached to the Deputies Report to increase IDA S resources. 42. The additional resources for financing the costs under the MDRI will be added to IDA S resources broadly following the established procedures for regular IDA replenishments. Donors will contribute the additional resources under Instruments of Commitments, which will be amended over time to reflect updated cost estimates as well as additional donor financing commitments as these become available. Donor financing will be provided over three time periods, as illustrated in Table A. There is broad agreement among donors to use the IDA13 burden-sharing framework as a basis for the increase in resources under the MDRI. They also agree that the structural gap in IDA13 of 9.39 percent should be closed to achieve full financing of IDA S MDRI costs. The details of the contribution process, and burdensharing are set out in paragraphs of the Deputies Report. Table A: Compensation Schedule for IDA Donors (SDR million) Period/ Fiscal Year la) Remaining IDA14 Period FY7 FY8 Sub-total ib) Remainder of First Decade FY9 FYI FYll FY12 FY13 FYI4 FY15 FY16 Sub-total IC) Subsequent 3 Decades FY17-44 Estimated Costs ,721 19,529 Total Costs, FY ,796 Source: IDA staff estimates. 43. In line with IDA13 and IDA14, donors set an effectiveness threshold of 6 percent for the increase in resources under the MDRI. The 6 percent effectiveness threshold will apply towards the estimated costs of debt cancellation for the 18 completion point HIPCs that are expected to qualify as of July 1,26 (SDR 17,39 million, see Annex 1.2 for details). In addition, donors will continue to provide financing commitments for debt relief costs, with a view to providing Instruments of Commitment, by IDA15, for at least 6 percent of total projected costs of IDA for all of the 42 countries that are expected to qualify for debt relief over time (SDR 24,796 million). Progress in reaching this target would constitute the first order of

15 ~ Financing business for the IDA15 discussions. In addition, effectiveness is conditional on receipt of at least 75 percent of firm, unqualified financing commitments for total costs of IDA in FY7 and FY8 (SDR 546 million, see Table A). The target date for effectiveness is May 31,26. B. Indicative Donor Pledges Received 44. At present, donors have indicated their intention to provide aggregate financing commitments equivalent to about 87.8% of MDRI costs for the 18 completion-point HIPCs. Table B illustrates the current status of indicative pledges received from donors. Table B: Summary of Indicative Donor Pledges Remaining IDA14 Remainder of First Subsequent 3 Costs for 18 CP Total MDRI Costs indications from Period Decade Decades HIPCs IDA donors (FYO7-8) (FY9-16) (FY 17-44) (FY7-44) (FYO7-44) SDRm in% SDRm in% SDRm in% SDRm in% SDRm in% Firm Financing % 1, % 82.4% 2, % 2, % Oualified Financing % 1, % 11, % 12, % 12, % Subtotal % 3, % 11, % 15, % 15, % To be committed 7 1.3% 1, % 8, % 9, % 2, % Total % 4,721 1.% 19,529 1.% 24,796 1.% 17,39 1.% C. Impact on IDA S Commitment Authority 45. The MDRI will lower the volume of IDA s credit reflows that become available for new assistance commitments in the future. Starting from FY89, the Executive Directors authorized IDA to make advance commitments for lending against future reflows and other internal resources. The Advance Commitment Scheme was established in recognition of the fact that credits disburse over about one decade and therefore cash in hand is not needed at the time of commitment. By committing future credit reflows from IDA borrowers in advance of their receipt, IDA is able to maximize the volume of internal resources that become available for commitment today. 46. At each replenishment, the size of commitment authority is determined by adding available donor contributions; IBRD net income transfers; and internal resources of IDA.25 To determine the appropriate level of internal resources for a replenishment, long-term financial projections are used to manage IDA S cash flow risk on a going concern basis, under a set of core assumptions. The objective is to maintain sufficient liquidity to accommodate future disbursements on credits and grants, while maximizing the use of available resources, including credit reflows and liquid assets, to support a high volume of commitments. Core assumptions applied for base-case financial planning of IDA are reviewed regularly by IDA S Executive Internal resources are primarily composed of principal reflows from IDA credits and also include investment income and other resources, such as a draw-down of IDA s liquid assets.

16 Directorsz6 and the IDA Deputies in conjunction with regular replenishments. In the base-case scenario, assuming full donor replacement of IDA s forgone reflows due to debt relief, commitment authority of IDA would increase by about 2% p.a. on average over the long term. 47. The base-case scenario indicates that IDA s liquid assets would fall to a minimum prudential level of one third of average annual disbursements, by IDA16/17. This liquidity draw-down would be the result of the high level of internal resources committed under IDA13 and, in particular, under IDA14, which significantly exceeded the volume of available credit reflows and projected investment income. This reflects the objective of lowering the level of liquid assets of IDA over time and maximizing the volume of available commitment authority. 48. As long as donors provide firm, unqualified financing commitments for IDA s MDRI costs over 1 years, adding a further 3 years at each future replenishment, the MDRI would not reduce IDA s advance commitment capacity. An unqualified commitment from donors would substitute for contractual credit repayments from borrowers and could be committed against in advance. Qualified or political financing commitments from the donors would not substitute for contractual credit repayments and could not be committed against in advance. If donors provide less than firm, unqualified financing of IDA s MDRI costs over 1 years, IDA would have two choices: (i) to lower its future commitment authority to account for the reduced amounts of available, firm donor financing, so as to maintain IDA S future level of liquidity at around minimum levels, or (ii) to maintain commitment authority unchanged from the base-case scenario, thereby further drawing down liquidity, below the level judged to be the pruden ti a1 mini mum. 49. Based on current donor indications for MDRI financing, it can be expected that about two thirds of IDA s forgone reflows over the ensuing ten years would be covered through firm, unqualified donor commitments by the time of concluding the IDA15 discussions. Under this scenario, when incorporating MDRI contribution cash flows over 1 years, IDA would be able to maintain its IDA15 commitment authority unchanged from the base-case while drawing down its projected liquidity level to around $1 billion by IDA16/17. This would be lower than the minimum target level of about $3-4 billion (based on some $1 billion of average annual disbursements of IDA expected by that time), but positive nevertheless. 5. IDA could operate normally with this lower level of liquidity, provided that donor encashments as well as borrower repayments occur as expected and there would be no unforeseen additional demands on IDA s assistance. IDA would be subject to a higher risk of seeing its level of liquidity fall to zero due to such unexpected events. Faced with an unexpected shock to liquidity, IDA could either borrow on a short-term basis in the markets or it could ask donors to encash their financing contributions on an accelerated basis. Approvals of new credits and grants could also be delayed to ease short-term disbursement pressures. In the unlikely event that all of these actions would not restore liquidity to positive levels, IDA would need to in the worst case delay disbursements on credits and grants. 26 A recent discussion of the core assumptions is included in Investment of IDA s Liquid Assets: A Review, IDNAC25-57, June 22,25. To reflect the agreement of donors for MDRI financing, regular donor contributions to future IDA replenishments are assumed to increase by 2% p.a. in SDR terms after IDA14. IDA s current level of liquidity of about $13 billion (as of end-december 25) is nearly twice the volume of its annual disbursements on credits and grants.

17 This analysis suggests that IDA may be able to accommodate less than full and firm donor financing of its rolling lo=year costs under the MDRI. It could do so without lowering IDA15 commitment authority vis-&vis its financial planning base-case. For this to be feasible, however, at least two thirds of IDA S rolling 1-year MDRI costs need to be financed through firm donor commitments. Beyond IDA15, commitment authority would be lower than in the base-case scenario if donors provided less than full, firm MDRI financing over a rolling 1-year period, as the necessary liquidity cushion would no longer be available. D. Monitoring of Donor Financing Over Time 52. In welcoming the MDRI, the Development Committee asked the Bank to prepare a compensation schedule and monitoring system of all donor contributions towards financing IDA s costs under the MDRI. The objective is to track MDRI financing amounts periodically over time and separately from other donor contributions towards future IDA replenishments. As stated in the IDA Deputies Report, donors agree that their MDRI contributions will be additional to donors regular financial support to IDA. They established a contribution baseline at the level of regular donor contributions in IDA14, to be kept constant in real SDR terms over time. Compensatory financing of IDA S forgone credit reflows due to the MDRI will be additional to this baseline. In addition, the financing framework of future replenishments will also continue to include other special financing items such as compensation for IDA S HIPC-related costs and financing of forgone principal reflows due to IDA grants. 53. For transparency and consistency of periodic monitoring, donor contributions for MDRI financing will be recorded separately from regular IDA replenishment contributions in IDA s published financial statements. MDRI contributions will be monitored and reported regularly in the accompanying supplemental statements and notes to IDA S annual, audited financial statements. These supplemental statements and notes will contain information on the volume of debt relief by eligible HIPC country and the amount of compensatory resources received by donor under the MDRI. The monitoring will be carried out against the amount of donor contributions required based on the political commitment of donors for full financing of IDA S costs over the entire duration of the MDRI. E. Implementation Costs 54. MDRI implementation by IDA will demand staff time and resources for required changes to information and payment systems necessary for tracking donor contributions as well as changes to credit agreements and accounting systems. Administrative and capital costs in terms of staff resources and system requirements are estimated at $3.6 million over four fiscal years. Costs include one-time expenses for preparation and implementation of the MDRI, as well as recurrent costs primarily related to donor compensation arrangements. Management intends to utilize and integrate to the extent possible current processes under the HIPC Initiative to determine country eligibility, and to monitor resources freed up by debt relief under the MDRI. Additional costs would be incurred in connection with financial operations and accounting activities necessary for accurate and transparent reporting of debt relief delivered, and donor resources received, under the MDRI.

18 V. LEGAL CONSIDERATIONS FOR DEBT CANCELLATION 55. Implementation of the MDRI will require IDA to provide 1 percent de,t relief for eligible countries. As discussed in the staff paper of September 25, IDA S Articles of Agreement authorize IDA to agree to a relaxation or other modification of financing terms.28 In 2, IDA s Executive Directors decided that an interpretation of the Articles was required to provide partial debt forgiveness in the context of the Enhanced HIPC Initiative. 56. The accompanying Legal Memorandum at Annex 2 reviews the legal framework applicable to IDA s implementation of the MDRI. The Memorandum concludes that debt cancellation requires a formal interpretation, under Article X of IDA S Articles of Agreement, by the Executive Directors of Article V, Section 3 because the Executive Directors formal interpretation of the Section in 2 only addressed partial forgiveness of amounts, not full cancellation. The memorandum concludes that there is reasonable legal basis for the Executive Directors to interpret that provision to permit total debt forgiveness and that the Executive Directors can reasonably determine that such an interpretation to allow total debt forgiveness under the MDRI would be consistent with IDA S fundamental features under its Articles, and thus fall within the interpretative powers of the Executive Directors. VI. RECOMMENDATIONS 57. It is recommended that the Executive Directors: (a) (b) (c) adopt the decision attached as Annex 3 to this paper that total debt cancellation for eligible countries i s consistent with the terms of Article V, Section 3 of IDA s Articles of Agreement; approve the proposed debt cancellation and the detailed implementation modalities described in paragraphs 11 through 4 of this paper; and approve the IDA Deputies Report and recommend to the Board of Governors the adoption of the draft Resolution attached to the Deputies Report. 28 See para. 46 in The G8 Debt Relief Proposal: Assessment of Costs, Implementation Issues, and Financing Options, IDNSecM25-466, September 6,25.

19 Annex 1 - Data Tables Annex 1.1 Annex 1.2 Annex 1.3 Annex 1.4 Estimated Cost to IDA under the Multilateral Debt Relief Initiative Estimated MDRI Debt Relief by IDA Country MDRI Impact on IDA Country Allocations: Base Case, no Graduations MDRI Impact on IDA Country Allocations: Growth Case, with Graduations

20 -17- Estimated Cost to IDA under the Multilateral Debt Relief Initiative (SDR million) ANNEX CP HIPCs 1 DP HIPCs 1 pre-dp HIPC Sub-total 38 HIPCs 4 Ring-fenced Sunset Clause Countries Total 42 Countries Memo: 4 Other Sunset Countries Memo: Total 46 Countries FY7 235 FYO FYo FYlO Fill ! FY ( FY : FY FY f FY : Subtotal, to FY16 3, L , , , I ,13 1,52 7,283 FY / FY ( FY FY C FY ( FY FY FY FY FY oc FY FY FY FY FY FY FY FY FY FY M FY FY FY FY FY FY FY ,42 1,134 1,159 1,151 1,132 1,135 1,141 1,17 1, I ,12 1,212 1,237 1,228 1,27 1,26 1,27 1,174 1,15 1, ,9 1,123 I, 187 1,299 1,425 1,515 1,534 1,518 1,49 1,479 1,475 1,428 1,336 1,218 1, Total, FY ,39 4,87 1,892 23,369 1,428 24,796 6,754 31,551 Notes: (1) HIPC country assumptions MDRI debt relief for all of the 18 completion point HIPCs is assumed to become effective as of July 1,26. In addition, 8 of the 1 decision point countries are projected to benefit from MDRI debt relief during the third year of the IDA14 period, in FYO8. These 8 decision point HIPCs include: Burundi, Cameroon, Chad, Democratic Republic of Congo, Guinea, Malawi, Sierra Leone, and Sao Tome & Principe. During the IDA15 period (FYO9-FYI l), 36 of the current HIPCs plus all of the 4 possible future HIPCs under the sunset clause are currently projected to benefit from MDRI debt relief. Only two pre-decision point HIPCs are currently estimated to become eligible for MDRI debt relief by FY12, at the beginning of the IDA16 period: Myanmar and Togo. By IDA16, all HIPCs are assumed to receive debt relief under the MDRI. (2) Foreign exchange rate assumptions HIPC relief is denominated in USD terms. It is being converted into SDR equivalent amounts in order to determine the volume of MDRI debt relief in SDR terms (= 1% of debt service to IDA minus HIPC debt relien. (a) SDR-denominated credits: MDRI relief is calculated as 1% of SDR-based debt service minus USD-based HIPC relief converted into SDR equivalents using the IDA14 hedged FX rate for HIPC costs up to FYO8 and the MDRI FX reference rates for HIPC relief thereafter. (b) USD-denominated credits: MDRI relief is calculated as 1% of USD-based debt service minus USD-based HIPC relief. The resulting net remaining USD debt service is converted into SDR equivalents using the MDRI FX reference rates.

21 - 18- ANNEX 1.2 Estimated MDRI Debt Relief by IDA Country a/ (SDR million) Recipient of MDRI Debt Relief IDA14 IDA15 IDA16 First Decade Total Relief FY7-8 FY9-11 FY12-14 FY7-16 FYO7-44 Cornoletion Point HIPCs (18) Benin Bolivia Burkina Faso Ethiopia Ghana Guyana Honduras Madagascar Mali Mauritania Mozambique Nicaragua Niger Rwanda Senegal Tanzania Uganda Zambia Sub-total Decision Point HIPCs (1) Burundi Cameroon Chad Dem Republic of Congo Gambia Guinea Guinea-Bissau Malawi Sierra Leone Sao Tome and Principe 1/ Sub-total Pre-decision Point HIPCs (1) Central African Republic Comoros Congo, Republic of Cote divoire Lao, People's dem republic Liberia MY- Somalia Sudan Togo Sub-total TOTAL, 38 HIPCS Sunset clause: rine-fenced (41 Eritrea Haiti Kyrgyz Republic Nepal Sub-total GRAND TOTAL, 42 COL'NTFUES , , , , , , , , ,364 3,857 17, , , , ,216 1,858 5,43 23, , ,27 1,955 5,268 24,796 1/ Debt relief to Sao Tome and Principe is less than SDR 1 million over the IDA14 period. 'Ring-fenced' countries under the HIPC sunset clause are defined as of September 25.

22 - 19- ANNEX MDRI Impact on IDA Country Allocations: Base Case, no Graduations (overall IDA envelope i s increasing by 2% p.a.; in SDR million) IDA14 IDA15 IDA16 IDA17 IDA18 IDA19 IDA2 Total Benin Burha Faso Ethiopia Ghana Madagascar Mali Mauritania Mozambique Niger Rwanda Senegal Tanzania Uganda Zambia Bolivia Guyana 7 IO 1 9 IO Honduras Nicaragua Completion Point HIPCs Sub-Total Burundi Cameroon Chad Congo, Democratic Republic of Gambia, The Guinea Guinea-Bissau Malawi Sao Tome and Principe s Siema Leone Decision Point HIPCs Sub-Total Central African Republic Comoros Congo, Republic of Cote d'lvoire Liberia Somalia Sudan Togo Lao People's Democratic Republic Myanmar Pre-decision Point HIPCs Sub-Total Eritrea Kyrgyz Republic Haiti Nepal AA SA2 51L1 6ni < M IO<< "Hard term" window Total Note: Country allocations do not include : "Hard term'' window resources; resources set aside for arrears clearance; and resources set aside for regional projects. Assumptions on MDRI Implementation, as per "The Multilateral Debt Relief Initiative: Implementation Modalities for IDA" (IDA/SecM25-592). Assumptions on the Performance Based Allocation: Countries' relative performance remains constant over time. Relevant country classifications (and ensuing allocative implications). e.g. IDA-only, post-conflict, etc. - are kept as of IDA14. Countries' allocations at any given year are fully committed in that same year, that is, there is DO frontloading or backloading. Grant eligibility ("traffic lights") for MDRI-eligible countries changes as a result of debt relief, in accordance with the frst pillar of the DSF-based IDA14 grants framework. The main allocative implication of such changes is that countries that become grant ineligible are no longer subject to a granb-related volume discount on their allocations. Gross PBA-based allocations increase due to a growth rate of 2% p,a. on IDA'S overall assistance envelope. There is no graduation out of IDA, nor reverse graduations back into IDA.

23 - 2 - ANNEX 1.4 MDRI Impact on IDA Country Allocations: Graduation Scenario (overall IDA envelope is increasing by 2% p.a.; in SDR million) IDA14 IDA15 IDA16 IDA17 IDA18 IDA19 IDA2 Total Benin Burkina Faso Ethiopia Ghana Madagascar Mali Mauritania Mozambique Niger Rwanda Senegal Tanzania Uganda Zambia Bolivia Guyana Honduras , , , , , , , , , , , , ,22 2,87 12,147 3,917 2,657 1, ,74 1,6 1,273 1,171 9,83 4, ,92 Nicaragua Burundi Cameroon Chad Congo, Democratic Republic of Gambia, The Guinea Guinea-Bissau Malawi Sao Tome and Principe Sierra Leone Decision Point HIPCs Sub-Total 1,16 1,625 1,696 1,744 1,977 2,17 2,259 12,424 Central African Republic Comoros Congo, Republic of Cote d'ivoire Liberia Somalia Sudan Togo , Lao People's Democratic Republic Myanmar Pre-decision Point HIPCs Sub-Total ,211 - Eritrea Kyrgyz Republic Haiti ,19 I , , , Nepal ,52 Sunset Clause Countries Sub-Total 1,456 1, , , "Hard term" window Total 13,89 2,585 21,892 23,231 24,643 26,152 27,75 157,342 Note: Country allocations do not include: "Hard term" window resources; resources set aside for arrears clearance; and resources set aside for regional projects Assumptions on MDRl Implementation, as per "The Multilateral Debt Relief Initiative": Implementation Modalities for IDA" (IDA/SecM25-592). Assumptions on Performance Based Allocations: Countries' relative performance remains constant over time. Relevant country classifications (and ensuing allocative implications) - e.g. IDA-only, post-conflict, etc. - are kept as of IDA14, unless countries are graduating. Countries' allocations at any given year are fully committed in that same year, that is, there i s no frontloading or backloading. Grant eligibility ("traffic lights") for MDRI-eligible countries changes as a result of debt relief, in accordance with the first pillar of the DSF-based IDA14 grants framework. The main allocative implication of such changes is that countries that become grant ineligible are no longer subject to a grants-related volume discount on their allocations. Gross PBA-based allocations increase due to a growth rate of 2% p,a. on IDA'S overall assistance envelope. Projected IDA country gaduations are factored in.

24 ANNEX 1.5 Projected Total IDA Assistance Flows (New IDA Commitments plus Forgone Reflows): Using Base Case Assumptions (overall IDA envelope i s increasing by 2% p.a.; in SDR million) IDA14 IDA15 IDA16 IDA17 IDA18 IDA19 IDA2 Total Benin Burkina Faso Ethiopia Ghana Madagascar Mali Mauritania Mozambique Niger Rwanda Senegal Tanzania Uganda Zambia Bolivia Guyana Honduras Nicaragua Completion Point HIPCs Sub-Total Burundi Cameroon Chad Congo, Democratic Republic of Gambia, The Guinea Guinea-Bissau Malawi Sao Tome and Principe Sierra Leone Decision Point HIPCs Sub-Total Central Afrcan Republic Comoros Congo, Republic of Cote d'lvoire Liberia Somalia Sudan Togo Lao People's Democratic Republic MYLUmar Pre-decision Point HIPCs Sub-Total Eritrea Kyrgyz Republic Haiti Nepal Sunset Clause Countries Sub-Total Remaining IDA Countries Sub-Total Total Note: Country allocations do not include : "Hard term'' window resources: resources set aside for arrears clearance; and resources set aside for regional projects Assumptions on MDRI Implementation, as per "The Multilateral Debt Relief Initiative: Implementation Modalities for IDA" (IDA/SecM25-592). Assumptions on the Performance Based Allocation: Countries' relative performance remains constant over time. Relevant country classifications (and ensuing allocative implications) - e.g. IDA-only, post-contlict, etc. - are kept as of IDA14. Countries' allocations at any given year are fully committed in that same year, that is, there is no frontloading or backloading. Grant eligibility ("traffic lights") for MDRI-eligible countries changes as a result of debt relief, in accordance with the first pillar of the DSF-based IDA14 grants framework. The main allocative implication of such changes is that countries that become grant ineligible are no longer subject to a grants-related volume discount on their allocations. Gross PBA-based allocations increase due to a growth rate of 2% p,a, on IDA'S overall assistance envelope. There is no graduation out of IDA, norreverne graduations back into IDA.

25 Annex 2 Memorandum of the General Counsel

26 Debt Relief by the International Development Association Memorandum of the General Counsel March 14,26 I. Introduction 1. Implementation of the Multilateral Debt Relief Initiative (MDRI or the Initiative) by the International Development Association (IDA) has two principal elements: cancellation of debt owed to IDA by MDRI eligible countries and financing of IDA s costs of debt cancellation. The paper, IDA s Implementation of the Multilateral Debt Relief Initiative (the Implementation Paper), describes the implementation modalities recommended for IDA s implementation of the MDRI, including IDA s irrevocable cancellation of the debt covered under the Initiative for eligible countries. The compensation arrangements are described in the Report of the IDA Deputies, Additions to IDA Resources: Financing the Multilateral Debt Relief Initiative (the Deputies Report) and in the attached draft Resolution of IDA s Board of Governors (the draft Resolution). With the Implementation Paper, the President has recommended that IDA s Executive Directors: (a) (b) (c) decide on an interpretation of IDA s Articles of Agreement to permit total debt forgiveness for eligible countries; approve the implementation modalities specified in the Implementation Paper; and approve the Deputies Report and transmit the draft Resolution to the Board of Governors for approval. 2. This Memorandum reviews the legal framework applicable to IDA s implementation of the MDRI and concludes that: (a) (b) there i s a reasonable legal basis for a formal interpretation by the Executive Directors of Article V, Section 3 of IDA s Articles of Agreement to permit total debt forgiveness; and the Executive Directors can reasonably determine that such an interpretation to allow total debt forgiveness, in general and under the MDRI in particular, would be consistent with IDA s fundamental features under its Articles and thus fall within the interpretative powers of the Executive Directors. The Report of IDA Deputies, Additions to IDA Resources: Financing the Multilateral Debt Relief Initiative [Deputies Report] and accompanying draft Resolution are circulated as Attachment I to the Implementation Paper.

27 The Initiative 3. The Implementation Paper recommends the cancellation of 1 percent of the debt owed to IDA by countries that reach the Completion Point under the Enhanced Heavily Indebted Poor Countries (HIPC) Initiatives2 Debt disbursed and outstanding as of the cutoff date of December 31,23 will be eligible for cancellation. Eighteen countries that have already reached the HIPC Completion Point would benefit upon confirmation of eligibility by the Executive Directors. A further ten countries that have only reached Decision Point and ten countries that have yet to reach Decision Point would become eligible once each reaches its Completion Point. Eligible countries could also include four countries that may potentially qualify as HIPCs by the end of 26 under the extension of the HIPC sunset clause. 4. The Initiative has been premised upon the commitment of donor governments to provide additional resources to ensure that the financing capacity of IDA is preserved, through dollar-fordollar compensation for IDA s forgone reflows. For IDA to receive these additional resources, an increase in IDA s resources is recommended under the draft Resolution. Following the arrangements for regular IDA replenishments, IDA members will make their subscriptions and contributions to IDA through the deposit of Instruments of Commitment (IoCs), whether Unqualified or Q~alified.~ The draft Resolution (paragraph 6 (a)) specifies that the addition to IDA resources will only become effective upon receipt by IDA of IoCs that provide Unqualified and Qualified Commitments totaling SDR 1,434 million (representing 6 percent of currently estimated MDRI costs for the 18 Completion Point HIPCs), including SDR 41 million in Unqualified Commitments for the remaining IDA14 period (75 percent of the total MDRI costs for that period). The Implementation Paper recommends that MDRI debt cancellation take effect when the increase in IDA resources has become effective Debt Forgiveness under IDA s Articles 5. IDA S power to provide debt forgiveness derives from its Articles. The Articles require that all decisions by the Association must be guided by IDA s purposes, which are set out in Article I. Those purposes include:...to promote economic development, increase productivity and thus raise standards of living in the less-developed areas of the world...in particular by providing financing.,,..on terms that bear less heavily on the balance of payments than those of conventional loans.... Modifications to the Heavily Indebted Poor Countries (HIPC) Initiative, IDNSecM99-475, July 26, Under paragraph 2 (b) of the draft Resolution, an Unqualified Commitment i s an agreement by a Contributing Member to pay its subscription and contribution, in whole or in part, without qualification, and a Qualified Commitment is an agreement by a Contributing Member to pay a part of its subscription and contribution subject to necessary parliamentary or legislative approval. In the case of a Qualified Commitment, the member undertakes to exercise its best efforts to obtain necessary approvals by the related payment dates. The Deputies Report points out that this form of Qualified Commitment differs from the form used in regular IDA replenishments, where the member s commitment is subject only to the adoption of the necessary appropriation legislation: In view of the long-term nature of donors commitments under the MDRI and the pattern of foregone reflows which peak after about 2 years, a Qualified Commitment under this replenishment may, on an exceptional basis, be subject to necessary parliamentary or legislative approvals. Deputies Report, supra note 1, paragraph 18.

28 Article I serves to highlight IDA s particular mandate to provide finance on concessional terms. Debt cancellation, where appropriate, is consistent with that mandate and with IDA S purposes of promoting development, increasing productivity and raising the standards of living in lessdeveloped countries. 6. IDA S Articles specifically authorize IDA to agree to a relaxation or other modification of financing terms, under Article V, Section 3: The Association may, when and to the extent it deems appropriate in light of all relevant circumstances, including the financial and economic situation and prospects of the member concerned, and on such occasions as it may determine, agree to a relaxation or other modification of the terms on which its financing shall have been provided. In addition to this express power, IDA also has the power under the Articles to exercise such other powers incidental to its operations as shall be necessary or desirable in furtherance of its purpose^."^ For IDA to utilize one of these implied, incidental powers, it i s enough that its exercise may further the achievement of its statutory purposes, and that it is not prohibited by or inconsistent with the Articles of Agreement. Successive General Counsel of the International Bank for Reconstruction and Development (Bank or IBRD) and IDA have maintained that IDA retains the general implied power of a lender to adjust loan termss6 7. IDA has provided partial debt forgiveness in the context of the Enhanced HIPC Debt Relief Initiative, including forgiveness of up to 9% of a country s debts to IDA. IDA was authorized to do so in 2, when a formal interpretation of the Articles by the Executive Directors was considered necessary because IDA s Articles do not contain any provisions specifically authorizing IDA to provide debt forgivenes~. ~ By a decision under Article X, the Executive Directors decided that provision of debt relief through the forgiveness of a portion of the debt service on credits,,, is consistent with the terms of Article V, Section 3 of the Articles of Agreement. * 8. Consistent with IDA s practice and that of the Bank, the 2 interpretation was based on a legal memorandum which concluded that it was reasonable for the Executive Directors to make that interpretation. To reach that conclusion, both the ordinary meaning and the intended meaning of the words relaxation or other modification of the terms were analyzed. The preparatory discussions on IDA S Articles were reviewed, including the observation of a former IDA Article V, Section 5 (vi). Additions to IDA Resources, Memorandum of the General Counsel (Aron Broches), September 9, 1963 (R63-22). Treatment of Bank Borrowers in Cases of Acute Exchange Stringencies and Default, Memorandum of the Vice President and General Counsel (Ibrahim F. I. Shihata), June 12, 1986, SecM86-66/1, June 18, 1986, paragraph 26, quoting former General Counsel Davidson Sommers and Aron Broches. Interpretation of IDA S Articles of Agreement, Memorandum of the General Counsel (KO-Yung Tung), paragraph 1, circulated as Annex 3 to Heavily Indebted Poor Countries (HIPC) Initiative - Note on Modalities for Implementing HIPC Debt Relief Under the Enhanced Framework, IDAlR2-4, January 1,2 [2 Memorandum]. The General Counsel of the African Development Fund (ADF) has also taken the view in connection with MDRI that the ADF has statutory authority for debt cancellation under the ADF s implied powers. IDA W2-4, paragraph 11. IDA W2-4, Annex 4, as recorded in the Minutes of the Meeting of the Executive Directors of the Association on January 27, 2, M2-4, IDAM2-4, approved on March 16, 2.

29 General Counsel that the term relaxation could be stretched to forgiving a debt absolutely, although it was his view that it would not be a normal interpretation of the language. The 2. legal memorandum further relied on the confirmation of the Bank s General Counsel to the IBRD Board in its final deliberations on IDA s draft Articles that IDA would have inherent power to do the things enumerated in [Article V,] Section 3. The provision had been included, in his view, not for the purpose of granting a specific power to IDA that it would not otherwise have had, but because it would be strange to omit from the IDA Articles a reference to relaxation or modification of terms when a somewhat similar provision was contained in the Bank Articles. On the basis of these elements, the 2 legal memorandum concluded that...in their discussion of IDA s draft Articles the Executive Directors left open the possibility that the provision could be interpreted as including partial debt forgiveness; and that it was not intended that the wording of Article V, Section 3 limit IDA s inherent powers Neither the 2 legal memorandum nor the interpretation by the Executive Directors at that time identified inherent limits on the interpretation of relaxation or other modification of terms to permit total debt forgiveness. IDA S implied power to forgive debt is not limited to partial forgiveness. Moreover, the text of Section 3 itself provides considerable latitude and flexibility for IDA in deciding to agree on relaxation or other modification of terms. That Section further provides that IDA s decision is to be taken both when and to the extent it deems appropriate in light of all relevant circumstances. These circumstances include the financial and economic situation and prospects of the member concerned as well as the potential impact on IDA. l3 Finally, IDA may exercise this latitude and flexibility on such occasions as it may determine. 1. In sum, there i s a reasonable legal basis in the provisions and history of Section 3 for the Executive Directors to interpret that clause to permit total debt forgiveness. Applying that interpretation in the MDRI context would be consistent with the provisions of Article V7 Section 3 inasmuch as the financial and economic situation and prospects of the member concerned is the primary prerequisite and rationale for debt cancellation for each eligible HIPC. Whether there are any limits on the power of the Executive Directors to decide on the proposed interpretation must be examined in the context of the legal practice of interpretation of IDA s Articles of Agreement. Davidson Sommers, who was then the Vice President in charge of IDA preparations, as quoted in Memorandum of Meetings of Financial Policy Committee on the International Development Association Draft Charter held on Tuesday, November 24, 1959 (IDN59-22), paragraph 91. lo Aron Broches, quoted in Memorandum of Meeting of Executive Directors held on Monday, January 25, 196 from 2.45 pm to 5.1 pm on the International Development Association Draft Charter (IDN6-7), paragraph 24. The IBRD Articles provisions are IBRD Article IV, Section 4 (c) and Section 7 (a). l1 Id. l2 2 Memorandum, supra note 6, paragraph 1. The similar provision in the Bank s Articles, referred to above, explicitly permits relaxation of terms when the Bank is satisfied that it is in the interests of the particular member and of the operations of the Bank and of its members as a whole. IBRD Article IV, Section 4 (c) and Section 7 (a). l3

30 IV Interpretation of IDA s Articles A. Formal and Informal Interpretation 11. Interpretation of IDA S Articles has, in practice, taken two forms: formal interpretation and informal interpretation. Under the Articles of both IBRD and IDA, the Executive Directors have the power to resolve questions of interpretation relating to the Articles, subject to a right of appeal to the Board of governor^.'^ Such a decision would be taken by a simple majority of votes cast. There has never been such an appeal to the Board of Governors for either the Bank or IDA. 12. Formal interpretation of IDA S Articles, and those of the Bank, is rare. IDA S Articles have been interpreted twice in its 45-year hi~try.l~ The Bank s Executive Directors have exercised their identical power to decide on 13 interpretations of the IBRD Articles;I6 their 1986 interpretation in respect of valuation of IBRD capital was the last formal IBRD interpretation, and the only one in the last 4 years. 13. Informal interpretation has been far more prevalent. Both IBRD and IDA charters have undergone a process of informal interpretation through decisions taken by the Executive Directors in the conduct of the general operations of each institution. Informal interpretation also has a pragmatic basis: In fact, internally, since the interpretative organ i s the executive organ that approves all matters of policy, including most of the [multilateral development banks] MDBs operations, there i s little added by following the process of interpretation under the constituent instruments [rather than] simply proceeding informally: interpretations are adopted by the same majority as ordinary matters and, while authoritative interpretations may be appealed, it is doubtful that the Governors would reverse a decision of the Executive Directors. Their decision is also by simple majority and the same countries with the same voting weight are represented on the Board of governor^."'^ B. Interpretation and Amendment 14. Whether the proposed formal interpretation fits within the interpretative powers of the Executive Directors also requires an examination of the relationship between interpretation and amendment of IDA S Articles. IDA S Articles provide for amendment in addition to interpretation, although no amendments have been adopted to date. * Amendments require approval by the Board of Governors, and acceptance by three-fifths of IDA members holding Article X, paragraph (a) of IDA s Articles provides that: Any question of interpretation of the provisions of this Agreement arising between any member and the Association or between any members of the Association shall be submitted to the Executive Directors for their decision.,.. Paragraph (b) permits a member to refer any interpretation by the Executive Directors to the Board of Governors, whose decision will be final. IBRD Article IX provides identical powers. Decision of the Executive Directors of IDA, June 3, 1987, Valuation of Initial Subscriptions and Related Issues and the 2 interpretation of Article V, Section 3, above. IBRD Article IX. A number of the early interpretations (a total of 1 in the first 5 years of the Bank s operations) were clarifications in connection with the Bank s first issuance of bonds in financial markets. Andres Rig Sureda, The Law Applicable to the Activities of International Development Banks, 25, at paragraph 79. Mr. Rigo served as Deputy General Counsel of the Bank. IDA Article IX.

31 four-fifths of the voting power.lg The Bank s Articles similarly provide for amendments2 and have been amended twice The limitations and distinctions between interpretation and amendment have been addressed over the years by previous General Counsel of the Bank, IDA and the International Monetary Fund (IMF).22 Ibrahim Shihata, for example, contrasted the interpretative function of the Executive Directors with the amendment process: In interpreting the Articles, the Executive Directors...have adequate latitude to enable them to achieve the Bank s objectives in the changing conditions in which the Bank operates. They are not expected to act strictly as a court of law and they should weigh carefully both the requirements of legal interpretation as well as the policy requirements dictated by the Bank s objectives and its changing environment. They should not, however, amend existing provisions under the guise of interpreting them. Amendment is a separate process to be undertaken under the different requirements of Article VIII. 23 Similarly, Heribert Golsong opined that the replacement of the 1944 U.S. gold dollar by way of interpretation could not be done if such replacement would contradict a basic element in the Bank s Articles of Agreement, such as a common standard of value. Interpretation of the Articles has to be made in good faith and in accordance with the ordinary meaning, and in the context of, the provisions of Agreement. Any decision under Article IX which would go beyond those limits or which would lead to a change in the ordinary meaning of the Articles or transform the rights and obligations of members of the Bank would constitute an abuse of the power of interpretation, and should be made subject to the formal amendment procedure under Article VIII. 24 He concluded that a decision departing from a common standard of value could only be reached by way of amendment of the Articles, and that, therefore, two proposed options could not be effected through interpretati~n.~~ In a survey of interpretation as practiced at the Bank, published after his 14-year tenure as General Counsel, Mr. Shihata concluded that changes introduced by way of interpretation, rather than amendment, cannot in any event change the fundamental Amendments proposing to modify three provisions require acceptance by all members: (i) the right to withdraw under Article VII, Section 1; (ii) pre-emptive rights in respect of subscriptions under Article 111, Section 1 (c); and (iii) the limitation on members liability for obligations of IDA under Article 11, Section 3. IBRD Article VIII. For the Bank, amendments require acceptance by three-fifths of the members holding 85% of the total voting power. As with IDA, unanimous acceptance is required for: (i) the right to withdraw from the Bank; (ii) pre-emptive rights in respect of subscriptions; and (iii) the limitation on members liability. The Bank s Articles were amended in 1965 to permit lending to IFC and in 1989 to increase to 85% the voting power required for amendments. Joseph Gold, The Techniques of Response, The International Monetary Fund , Volume 11, Chapter 25, 1969 at page 572. Interpretation and the Exercise of Implied Powers in respect of the Bank s Standard of Value, Memorandum of the Vice President and General Counsel (Ibrahim Shihata), May 7, 1985, paragraph 4. Valuation of Capital Stock of the Bank in connection with the General Capital Increase, (Opinion of the Vice President and General Counsel (Heribert Golsong), SecM81-368, May 1, 1981, paragraph 5. Id. at paragraph 2.

32 features of the charter of an international organization, as is [also] the case in respect of the constitution of a state.9726 V. Interpretation to Permit Total Debt Forgiveness 16. Based on the legal analysis below, the Executive Directors can reasonably conclude that neither total debt cancellation in general nor total debt cancellation provided under the final proposed MDRI arrangements would change IDA s fundamental features under its Articles. That conclusion would mean that a decision to permit total debt forgiveness can be made by the Executive Directors through an interpretation of IDA s Articles, as discussed in Section IV above. Since this interpretation would expand an earlier formal interpretation permitting partial debt forgiveness, the proposed interpretation should also be made through a formal decision of the Executive Directors under Article X, rather than through the more common process of informal interpretation. 17. IDA s fundamental features are not specified in its Articles. Whether total debt forgiveness under Article V, Section 3 would change IDA s fundamental features under its Articles can be assessed by analyzing the potential impact of total debt cancellation on other provisions of its Articles. That potential impact is relevant for IDA s fundamental purposes, financial structure and members rights under the Articles. 18. IDA s Purposes. IDA s purposes must, under Article I, guide all its decisions. As noted in paragraph 5 above, debt cancellation in general would be consistent with IDA s purposes. For MDRI specifically, the Deputies Report confirms that debt cancellation under the MDRI deepens multilateral debt relief to low income countries and is intended to increase the resources available to participating countries and reinforce their efforts to achieve the Millennium Development Goals IDA s Financial Structure. IDA s financial structure under its Articles is based on capitalization through initial subscriptions and after that, through periodic additions to its resources : The Association shall at such time as it deems appropriate in the light of the schedule for completion of payments on initial subscriptions of original members, and at intervals of approximately five years thereafter, review the adequacy of its resources and, if it deems desirable, shall authorize a general increase in subscriptions. 28 Additional subscriptions are required to be authorized by the Board of Governors, by a twothirds majority of IDA s total voting power - this is the basis for IDA s replenishment process. While IDA s Articles establish this financial structure, the Articles do not require IDA to provide Interpretation and Amendment of the IBRD Articles of Agreement, in Ibrahim F.I. Shihata, World Bank Legal Papers (2) at page li, citing, inter alia, the opinion of Heribert Golsong cited above and the constitutions of some states that prohibit certain fundamental changes even through amendment. Deputies Report, supra note 1, at paragraph 4. IDA Article 111, Section 1. The provisions for initial subscriptions are found in Article 11. IDA Article 111, Section 1 (d) and Article VI, Section 2 (c) (ii).

33 - 3 - financing at a particular level. What the Articles require is periodic review of resource adequacy, and replenishment of IDA s resources when deemed desirable by a two-thirds majority in IDA s Board of Governors. Total debt cancellation does not conflict with these requirements. 2. IDA s financial resources under its Articles also include reflows, the stream of debt service payments from its borrower^.^' Reflows are not, however, required in all cases under the Articles. First, IDA is permitted to provide financing without reflows to the extent expressly authorized in the arrangements under which resources are furnished3 and has done so through the authorization of grant financing since the Eleventh Replenishment. Second, IDA S power to relax or otherwise modify terms under Article V, Section 3 has already been interpreted to permit partial debt forgiveness. Under the Enhanced HIPC Initiative that gave rise to the earlier interpretation of that Section, up to 9% of debt has been forgiven in some cases, meaning that 9% of the related reflows have been cancelled. However, the absence of reflows could, in an extreme situation, mean that IDA could no longer provide any future financing. That would call into question IDA s ability to carry out its fundamental purpose of providing finance. Such extreme circumstances could also necessitate a decision by IDA s Board of Governors to authorize permanent suspension of IDA S operation^.^^ 21. MDRI s impact on IDA reflows is far from that extreme. Total debt cancellation under MDRI could potentially reduce the reflows relied on by IDA by USD37 billion over the next 4 years, currently about 25% of IDA s total reflows. In addition, the impact of MDRI on IDA would be mitigated by the provision of additional resources authorized under the draft Resolution and committed by members over time. This is consistent with a stated objective of MDRI that IDA s central role in development assistance should be sustained and enhanced, and that its financial strength should be ~reserved. ~~ 22. The key terms of authorization and commitment for these additional compensatory resources for MDRI are summarized below. (a) (b) The increase in IDA resources, and the terms under which members commit to make their subscriptions and contributions, will come into effect only if approved by a two-thirds majority of IDA s Board of Governors. Thereafter, members will make their commitments in forms - Unqualified Commitments and Qualified Commitments - that are defined by the Board of Governors Resolution, and are largely consistent with those used in IDA replenishment^.^^ These Instruments of Commitment constitute legally binding obligations of members, and will, under the Resolution, contain the member s confirmation that its commitments are legally binding.35 In practice, IDA s The role of reflows is evidenced by the Articles provisions that cover not only the use of subscriptions and other resources but also funds derived therefrom as principal, interest or other charges. IDA Article V, Section 2 (a) (i) and (ii). IDA Article V, Section 2 (a). IDA Article VII, Section 5 (a), requiring a majority of Governors exercising a majority of total voting power. Deputies Report, supra note 1, at paragraph 42. See note 2 supra. For example, the form of Instrument of Commitment (Attachment I to the draft Resolution) includes the statement: I hereby confirm, on behalf of the Government of [member country], that all necessary action

34 members have, over time, regularly provided the commitments authorized for them under IDA Replenishment Resolutions, and, with rare exceptions and occasional delays, made payments under those commitment^.^^ Debt cancellation will take place after the increase in IDA S resources has become effective. At the time of the first cancellations, IDA would have in hand Instruments of Commitment representing 6 percent of the current estimate of IDA S forgone reflows resulting from MDRI debt cancellation for countries that have reached their HIPC Completion Point by July 1, IDA s actual MDRI cost over the 4 year period will vary depending on country eligibility, country performance in reaching HIPC Completion Point, and exchange rate fluctuations. Thus, the draft Resolution (paragraphs 1 (f) and 2 (c)) also requires members to commit to adjustments in the amount of their commitments as required by changes in IDA S MDRI costs over time. For those members whose legal and budgetary systems do not countenance an upfront commitment for the entire period, the member is able to confirm, in its Instrument of Commitment, that it will provide additional Unqualified Commitments and/or Qualified Commitments as and when the necessary legal and budgetary authorization has been obtained.38 Unlike Unqualified and Qualified Commitments, such a confirmation i s not legally binding, but provides additional assurance of future donor financing that i s anticipated. A number of these donors are signatories to the September 23, 25 letter to the President of IDA, which expresses the highest level of political commitment to make legally binding commitments as soon as members are able under their parliamentary or legislative processes.39 The terms taken together as an interdependent package, provide a foundation for the Executive Directors to conclude that IDA is likely to receive sufficient additional resources to mitigate the potential impact on its reflows. The mitigation of MDRI s impact on IDA s reflows reinforces the conclusion that MDRI would not change fundamental financial features of IDA. [,except for necessary parliamentary or legislative approvals in respect of Qualified Commitments,] has been taken to authorize the commitments set out in paragraph 2 above, and that these commitments constitute a binding obligation of [member country] in accordance with the terms of the Resolution. IDA has written off $13 1 million as a result of the non-payment by one member under unqualified commitments in IDA 5 and IDA 6. Currently, payment of $328 million under another member s qualified commitments from IDA 12 and IDA 13 remains pending. Paragraph 6 (a) of the draft Resolution requires, for effectiveness, receipt by IDA from donors of Instruments of Commitment containing Unqualified and Qualified Commitments that total not less than SDR 1,434 million. That amount represents 6 percent of estimated MDRI costs for the 18 Completion Point HIPCs (approximately USD26 billion out of USD 37 billion). Effectiveness of the increase in resources also requires that those Instruments of Commitment contain Unqualified Commitments for payments due in 27 and 28 that total not less than SDR 41 million. That amount represents 75 percent of IDA s total estimated MDRI costs for the IDA14 period. Draft Resolution, Attachment I, paragraph 5. Deputies Report, supra note 1, at Annex 1.1.