BALANCE OF PAYMENTS WORKING GROUP

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1 EUROPEAN COMMISSION EUROSTAT Directorate C: National accounts; prices and key indicators Unit C-2: Section Balance of Payments 24 October 2012 BP/12/51 BALANCE OF PAYMENTS WORKING GROUP NOVEMBER 2012 Jean Monnet Building, Room M1 Luxembourg Starting: 27 November 2012 at 9.30 Ending: 28 November 2012 at Capital increases in multilateral development banks Item 22 of the Agenda

2 Capital increases in multilateral development banks Introduction The recording in government finance statistics of capital injections into Multilateral Development Banks (MDBs) has been discussed by the Financial Accounts Working Group (FAWG) meetings. As a result, a new draft chapter of the Manual on Government Deficit and Debt (MGDD) was drafted and submitted for the opinion of the CMFB in February After CMFB consultation, the new chapter IV.6 Capital increases in multilateral development banks was included in the fourth edition of the Manual on Government Deficit and Debt (MGDD), which was made available on the Eurostat website on 20 March During the CMFB consultation several Member States commented that they would find useful to have a list of MDB facilities predominantly providing concessional loans, as such list would also contribute to the consistent treatment among the Member States. The list was prepared by Eurostat and approved by the Member States in the FAWG meeting; it serves as a practical tool for EDP data compilers. Capital increases into Multilateral Development Banks the rules The main rule of capital injections to be treated as acquisition of equity is that the government providing funds for the entity should have expectations to earn a sufficient rate of return on its investment. In cases when governments inject funds without expecting sufficient return, or merely aiming at covering recent or past losses, the injections are to be treated as capital transfers. Following the above principle, a distinction has to be made between the MDB facilities providing concessional loans and those providing non-concessional loans. Non-concessional loans are made at market interest rates, thus by definition some return is expected for a MDB facility. Government injections into MDB facilities providing nonconcessional loans should be treated according the ESA 95 paragraph 5.95 (c), as other equity AF.513. On the other hand, concessional loans, being interest free loans or having an interest rate much below the market rate, are in fact generally not able to cover their funding and/or administrative costs, let alone generating a return. Their funding recourses deplete over time. Donor governments have to periodically replenish resources in order to maintain the MDB facility's activities at least at the same level. In substance these replenishments are seen as capital injections aimed to cover/prevent losses, therefore following the capital injections 1 The MGDD could be found on Eurostat's webpage: 2

3 rules, government injections into MDB facilities providing concessional loans should be treated as capital transfers. The recording of injections should therefore be based on the type of loans provided by the multilateral development banks: investments into MDB facilities providing concessional loans, which are provided at marginal or zero interest rate, are to be recorded as capital transfers, while investments into funds providing non-concessional loans should be recorded as acquisition of other equity, as proposed by the ESA95, paragraph 5.95 (c). The practical consequences of the new MGDD chapter Concessional lending facilities can include also grants and are targeted mostly for low-income countries; loans are contracted at well below-market interest rates and could also have these attributes: long repayment periods, grace periods. Non-concessional loans are contracted at market terms and, depending on a MDB, are targeted to middle-income and/or some creditworthy low-income governments as well as private sector companies. The main MDBs are listed in the MGDD Chapter IV.6: World Bank group African Development Bank (AfDB) Asian Development Bank (AsDB) Inter-American Development Bank (IDB) European bank for reconstruction and development (EBRD) For some of those institutions concessional lending windows are separate and operate under different name. This is a case of International Development Agency (IDA) within the World Bank group, Asian Development Fund (AsDF) within AsDB, African Development Fund (AfDF) within AfDB and the Fund for Special Operations (FSO) within Inter-American Development Bank. Capital increases into the above entities are to be treated as capital transfers. Some other MDBs do not have separate concessional lending windows and provide only market-based loans. This is a case of the EBRD and the EIB. The above information is summarised in Table 1. 3

4 Table 1: Facilities of Multilateral Development banks MDB Name of facility Type of facility International bank for Among other operations, Nonconcessional Reconstruction and loans World Bank group Development (IBRD) International Development Mainly concessional loans Association (IDA) International Finance Among other operations, Nonconcessional corporation (IFC) loans Non-concessional loans, other African Development operations Bank African Development Fund Mainly concessional loans (AfDF) Non-concessional loans, other Asian Development Bank operations Asian Development Fund Mainly concessional loans (AsDF) Non-concessional loans, other Inter-American operations Development Bank Fund for Special Operations (FSO) Mainly concessional loans European bank for reconstruction and development Non-concessional loans, other operations Other identified cases A few more institutions benefiting from capital increases by Member State governments were identified in the November 2010 Eurostat Questionnaire on public development "banks", multilateral development banks and export credit institutions. To our understanding some of financial institutions mentioned in the Questionnaire operate in a geographic region or within certain policy area. On the global scale they are not commonly associated to the MDBs, nevertheless capital increases into them are undertaken by a few or several Member States: Council of Europe Development Bank Nordic Investment Bank Black Sea Trade and Development Bank European Development Fund The Council of Europe Development Bank (CEB) 2 operates within the framework of the Council of Europe and supports its priorities. It is a multilateral development bank composed of 40 members including majority of EU Member States. It functions as a bank and thus among other type of financing provides non-concessional loans. 2 Information from 4

5 For certain priority areas interest-rate subsidies on CEB loans are provided from so called Selective Trust Account established within CEB. It seems that up to now, this account was funded via transfers from the Bank s annual profits upon agreement by the CEB Member States. A few Member States have set up separate Trust accounts in CEB to fund certain policies or provide technical assistance. For example Germany, Finland, the Netherlands, Norway and Switzerland have funded Human Rights Trust Fund while Spain has set up Spanish Social Cohesion Account. Following the MGDD rules, capital increases in CEB are to be treated as acquisition of equity, with the exception of funding provided to so called Trust accounts. The Trust funds are seen as donations and are not expected to give any return, thus a non-financial transaction is to be recorded, once Member State injects funds. Nordic Investment Bank (NIB) 3 is an international financial institution owned by Denmark, Estonia, Finland, Iceland, Latvia, Lithuania, Norway and Sweden. NIB promotes sustainable growth in the region focusing on competitiveness and sustainable development. Following the information publicly available on the NIB webpage, the Nordic Investment Bank functions as a bank and it seems that concessional loans are not being provided. NIB's member countries have subscribed to the bank's capital in proportion to their gross national income. The NIB acquires funds for lending by borrowing on the international capital markets. Recent capital increases (2009 and 2010) undertaken by the owners mainly took form of callable capital, thus following the MGDD chapter on MDBs "the callable part is considered as a contingent transaction, which is not to be recorded in the system". Black Sea Trade and Development Bank (BSTDB) 4 is a regional multilateral development bank established by 11 countries, among them Bulgaria, Greece and Romania. The bank foresees further increase in the capital by the shareholders. The last increases in the capital stock of the Bank were allocated to Member States in Following the information publicly available on the BSTDB webpage, the Bank functions as a bank and it seems that concessional loans are not being provided. From the information available in the bank's financial statements, it seems that the bank recently has faced some impairments in the loan portfolio, so following the MGDD rules, this aspect should be considered when judging on the treatment of further capital increases. Unless capital increases are not foreseen exclusively to cover losses, they can be treated as acquisition of equity. The European Development Fund (EDF) 5 is the main instrument for providing Community development aid in the African, Caribbean and Pacific countries and the overseas countries and territories. It is an EU extra-budgetary fund, and is funded by the Member States contributions following the contribution key as approved by the 2006 Agreement on Community aid under the multiannual financial framework for the period (OJ L p. 32). The EDF is lasting 6 years, each EDF lays out EU assistance to both individual countries and regions as a whole. Currently the EU is operating on its 10th EDF for the period The biggest parts of the EDF instruments are grants to the aforementioned countries. Being an extra budgetary fund of the EU, the EDF does not seem to 3 Information from 4 Information from 5 Information from 5

6 have share capital; therefore MS contributions to the EDF are to be treated as current international cooperation (D.74) as defined in ESA 95 paragraph b). Rasa Jurkonienė Unit D2 (Excessive Deficit Procedure (EDP) 1) 6

7 ANNEX I extract from the MGDD IV.6 Capital increases in multilateral development banks IV.6.1 Background of the issue 1. Multilateral Development Banks are institutions that provide financial support and professional advice for economic and social development activities in developing countries 6. The term Multilateral Development Banks (MDBs) typically refers to the World Bank Group (notably the IBRD International Bank for Reconstruction and Development and IDA International Development Agency) and four Regional Development Banks: The African Development Bank (AfDB), The Asian Development Bank (AsDB), The European Bank for Reconstruction and Development (EBRD), The Inter-American Development Bank Group (IDB). 2. MDBs are characterized by a broad membership, from both borrowing developing countries and from developed donor countries, which is not limited to member countries from the region of a regional development bank. Each bank has its own independent legal and operational status, although, with a similar mandate and a considerable number of joint owners, the MDBs maintain a high level of cooperation between themselves. 3. Most of the MDBs have two types of funds, often called lending windows or lending facilities. One type of lending window is used to make loans at marketbased interest rates. Such non-concessional loans are, depending on the MDB, extended to governments and private sector firms in middle income, and some creditworthy low-income, countries. The other type of lending window is used to make loans at (well) below-market interest rates (concessional loans) granted to the governments of low-income countries. 4. To offer non-concessional loans, the MDBs borrow money from international capital markets and then re-lend the money to developing countries. MDBs are able to borrow from international capital markets because they are backed by the guarantees of their member governments. This is provided through the ownership shares that member countries subscribe in each bank. Only a small portion (typically less than 5-10%) of the value of these capital shares is actually paid to the MDB ( paid-in capital ). The bulk of these shares is a form of guarantee that the donor stands ready to provide to the bank if needed. This is called callable capital, because the money is not actually transferred from the donor to the MDB unless the bank needs to draw on its members callable subscriptions because their resources are exhausted and they still need funds to repay bondholders. 6 They can be distinguished from other public banks, some nationally-owned and some set up between countries (e.g. the European Investment Bank). These banks are not specifically considered in this Manual. 7

8 5. Periodically, when donors agree that the future demand for loans from an MDB is likely to expand, they increase their capital subscriptions to an MDB s nonconcessional lending window in order to allow the MDB to increase its level of lending. 6. As the MDB extends concessional loans and grants to low-income countries, the window s resources for such activities become systematically depleted. The donor countries meet together periodically to replenish those resources. Thus, these increases in resources are called "replenishments", and most occur on a planned schedule ranging from three to five years. If these facilities are not replenished in good time, they will run out of resources and have to substantially reduce their levels of activity. 7. Some MDBs offer solely or mainly concessional loans (these are: IDA, Fund for Special Operations (FSO) at IDB, AfDF and AsDF) and therefore they are largely funded by contributions from the governments of its richer member countries or from the income of other MDBs (for instance IDA receives additional funds from IBRD's and IFC s income), and from borrowers' repayments of earlier credits. 8. MDB concessional loans are characterized by a very low interest rate and long maturities with grace periods. IDA credits typically have maturities of 35 or 40 years with a 10-year grace period on repayment of principal. There is no interest charge, but credits do carry a small service charge of 0.75 percent on disbursed balances. These are not only below market interest rates, but do not even cover funding and administrative costs. IV.6.2 Treatment in national accounts 9. The treatment in national accounts of government injections in MDBs depends on the type of loans provided by multilateral development banks. Injections into MDB facilities whose main or sole purpose is to provide concessional loans at marginal or zero interest rate should be recorded as capital transfers, while investments into MDB facilities providing non-concessional loans should be recorded as acquisition of other equity, as set out in ESA95, paragraph 5.95 (c): "government investments in the capital of international and supranational organisations, with the sole exception of the IMF, even if these are legally constituted as companies with share capital (e.g. the European Investment Bank)" are to be recorded as AF.513, other equity. Treatment of capital increase in MDBs Type capital injection / of Type of MDB facility Paid-in capital Callable capital Conversion of reserves into paid-in capital Hybrid capital increase Temporary increase Encashment period MDB facilities providing Shares and other equity Nothing recorded, until No implications Examine on a case by Loans (F.4), if cancelled F.5 at inception 8

9 nonconcessional loans F.5/F.513 called case basis D.9 MDB facilities providing mainly concessional loans D.9 Nothing recorded until called N/A Examine on a case by case basis Loans (F.4), cancelled D.9 if D.9 when due to be paid IV.6.3 Rationale of the treatment 10. MDBs may have two types of lending facilities or lending windows. Concessional loans are interest free loans or loans with an interest rate much below the market rate. Usually those loans are long term and have long grace periods. Despite a small service charge, MDBs facilities providing concessional loans are generally not able to cover their funding and/or administrative costs and thus their funding resources become depleted over time. In order to maintain their activities at least at the same level, MDBs facilities providing concessional loans have to receive replenishments from their donors. It is clear from the very beginning that MDB facilities providing concessional loans are not going to be profitable, and in substance these replenishments are rather similar to capital injections aimed to cover losses. Therefore, following the capital injections rules, government injections into MDB facilities providing concessional loans should be treated as capital transfers. 11. Non-concessional loans are made at market interest rates which implies that a return is expected or at least the borrowing costs and/or administrative costs of the MDB's facility are covered. Once MDB facilities providing non-concessional loans accumulate reserves, these can later be converted into capital and used for further operations. Therefore in practice, it is not very common that a MDB draws down its callable capital. As a matter of fact, capital increases by donor governments are usually needed for the purpose of new or expanding activities. Thus, government injections into MDB facilities providing non-concessional loans should be treated according the ESA 95 paragraph 5.95 (c), as other equity AF In the case of MDBs, capital increases by governments usually take the following forms: paid-in capital, callable capital, conversion of reserves into paid-in capital, hybrid capital increase, temporary increase and encashment period. IV Paid-in capital 13. In most MDB facilities, providing non-concessional loans, new paid-in capital represents only a fraction of their total capital. In this case the paid-in part will be considered as a financial transaction (purchase of shares and other equity) not impacting the government deficit. 9

10 14. In the case of paid-in capital to MDB facilities providing mainly or solely concessional grants and loans, the injection is recorded as a capital transfer. IV Callable capital 15. A large part of an MDB capital increase is usually structured as callable capital, i.e. not paid-in. The statistical treatment is as follows: the callable part is to be considered as a contingent transaction, which is not to be recorded in the national accounts system. This applies to both types of facilities of MDBs. Of course, once capital is called it must be analysed as paid-in capital. IV Conversion of reserves into paid-in capital 16. (A part of) the capital increase may be implemented through a conversion of accumulated reserves into permanent paid-in capital without any cash being transferred from shareholders. The statistical treatment is as follows: in ESA95 it is not the number of shares which needs to be examined, but their value. If some of the reserves were to be converted into shares, the value of the shareholding would still be the same. There would be therefore no direct implications for the accounts and no impact on government deficit and debt. 17. Facilities of MDBs providing mainly concessional loans and grants normally have no accumulated reserves, as they deplete all of their funds. Therefore this case does not apply to them. IV Hybrid capital increase 18. (A part of) the capital increase could be implemented through issuing a form of hybrid capital instrument (in combination with callable capital) with both debt and equity features. The statistical treatment cannot be judged in general; the precise conditions will have to be assessed on a case-by-case basis. IV Temporary increase 19. Contrary to a permanent increase, a capital increase may be indicated as only for a temporary period and (a part of) it is re-paid to members after an agreed period of time (e.g. when a crisis is over and the lending activities have returned to normal levels). The statistical treatment is as follows: a temporary increase with a scheduled repayment would be seen as a loan, even if at zero interest rate. Scheduled repayment will progressively decrease the outstanding amount of the loan. 20. The initial treatment as a loan applies to both cases of MDB facilities. If there is a subsequent loan cancellation, this would have to be recorded as capital transfer. IV Encashment period 21. It may be decided to stretch the actual cash payment by members of the paid-in part of the capital increase over a longer period of time, in several instalments (this could be up to 10 years). Here the two types of MDB facilities have to be distinguished. 22. In the case of a MDB facility providing mainly non-concessional loans, the statistical treatment is as follows, assuming that the capital increase is decided at inception (i.e. one decision concerning one capital increase, although with deferred payments, and not concerning many decisions for separate capital 10

11 increases over the years). An acquisition of equity is recorded at inception for the full amount of the paid-in capital. For the financial counterpart of amounts not paid initially in cash, the recording is determined by the length of the period of time in which instalments are to be paid. If they are paid quickly, within one year, the part not yet paid is recorded under other accounts payable (AF7), with no impact on the Maastricht debt. Beyond that, the counterpart is recorded as a loan (AF4) from the bank to government, with an impact on Maastricht debt. 23. For the MDB facilities providing mainly or solely concessional loans and grants, these payments are recorded as capital transfers. The time of recording would have to be in compliance with ESA95 par , which is when the payment is due to be made. 11