Financing the Multilateral Debt Relief Initiative

Transcription

1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Additions to IDA Resources: Financing the Multilateral Debt Relief Initiative International Development Association March 10,2006 Attachment I

2 ABBREVIATIONS AND ACRONYMS AfDF CP HIPC IBRD IDA IFIS IMF IOC MDBs MDGs MDRI ODA SDR African Development Fund Completion Point Heavily Indebted Poor Country International Bank for Reconstruction and Development International Development Association International Financial Institutions International Monetary Fund Instrument of Commitment Multilateral Development Banks Millennium Development Goals Multilateral Debt Relief Initiative Official Development Assistance Special Drawing Rights

3 Table of Contents.. I I1 I11. IV V.. INTRODUCTION... 1 KEY FEATURES OF THE MULTILATERAL DEBT RELIEF INITIATIVE... 2 IMPLEMENTATION MODALITIES FOR DEBT CANCELLATION... 3 FINANCING ARRANGEMENTS... 4 A. Description of the Contribution Process... 4 B. Use ofidal3 Burden Shares... 7 C. D. E. F. G. H. Efectiveness of the Increase in Resources for Debt Relief Costs... 7 Payment. Encashment and Applicable Foreign Exchange Rates... 8 Voting Rights... 9 Commitment Authority Baseline to Establish Additionality of Donor Financing Monitoring of Donor Contributions CONCLUSIONS AND RECOMMENDATION LIST OF TABLES Table A: Table B: Compensation Schedule for IDA Donors... 7 Summary of Indicative Donor Pledges... 8 ANNEXES Annex 1: Background Documents Annex 1.1 Letter to the President of the World Bank from the G-8 Finance Ministers on the G-8 Debt Proposal. Washington. DC. September Annex 1.2 Excerpts from Development Committee CommuniquC. Washington. DC. September Annex 2: Data Tables Annex 2.1 Estimated Costs to IDA under the MDRI Annex 2.2 Estimated MDRI Debt Relief by IDA Country Annex 2.3 Estimated Timing of HIPC Countries Reaching Their Completion Points Annex 2.4 Indicative Pledges to the MDRI - SDR millions Annex 2.5 Indicative Pledges to the MDRI - National Currency millions Annex 3: IDA Board of Governors Draft Resolution Attachment I Instrument of Commitment - Contributing Members Attachment I1 Instrument of Commitment - Subscribing Members Table 1 Compensation Schedule for IDA Donors Table 2a Contributions to the MDRI - SDR millions Table 2b Contributions to the MDRI - National Currency millions Table 3 Subscriptions. Contributions and Votes... 39

4 Financing the Multilateral Debt Relief Initiative I. INTRODUCTION 1. The Fourteenth Replenishment of IDA resources was finalized in the Spring of 2005, with the adoption of the IDA14 Resolution on April 13,2005 by IDA S Board of Governors. The IDA14 Replenishment includes a new framework for allocating IDA grants, which is designed to address the prospective risk of debt distress of IDA countries. 2. Subsequent to the conclusion of the IDA14 negotiations, member countries of IDA began discussion of a proposal by the G-8 group of countries that would provide additional relief on the existing stock of debt owed to IDA by countries that have reached the completion point under the Heavily Indebted Poor Countries (HIPC) Initiative.2 The proposal was subsequently welcomed by the Development Committee3 on September 25, The Development Committee urged donor countries to ensure financing to fully compensate IDA for forgone reflows resulting from debt relief, The Bank was also asked to prepare a compensation schedule and monitoring system of all donor contributions, and proceed with the steps to ensure all necessary arrangements for imp~ementation,.~ 3. Negotiations on this proposal, now known as the Multilateral Debt Relief Initiative (MDRI or the Initiative ), continued at a meeting of Deputies of donor countries and representatives of borrower countries (collectively referred to in this report as Participants ) in Washington, DC on December 6th and 7th, The meeting was chaired by Geoffrey Lamb, Vice President of the World Bank and Senior Counselor for IDA. Participants based their discussions and recommendations on a draft paper which detailed the implementation modalities of the MDRI. A final version of the paper on implementation modalities will take into account Participants recommendations and will be submitted to the Executive Directors for their approval in March 2006, alongside this report. 4. At their December 2005 meeting, Participants expressed their strong and unanimous support for providing additional debt relief through the MDRI, as such relief would scale up the resources available to developing countries and reinforce their efforts to achieve the Millennium Development Goals (MDGs). Participants underscored the central role of IDA in supporting these efforts. They noted that the cancellation of such large volumes of reflows from past IDA assistance raises questions about accountability for aid effectiveness, and they encouraged IDA to pursue its recent efforts on results and performance measurement. They also recognized the exceptional nature of the Initiative and the interdependency between providing debt relief and IDA Board of Governors Resolution No. 209, Additions to Resources: Fourteenth Replenishment, April 13, The text of the Resolution can also be found at Annex 3 to the Report from IDA s Executive Directors to the Board of Governors, Additions to IDA Resources: Fourteenth Replenishment, approved by IDA s Executive Directors on March 10,2005. The initial proposal is set out in the G-8 Finance Ministers CommuniquB entitled Conclusions on Development, issued on June 11,2005. Formally, the Joint Ministerial Committee of the Boards of Governors of the Bank and the Fund on the Transfer of Real Resources to Developing Countries. Development Committee CommuniquC, para. 5, issued on September 25, 2005 (see Annex 1.2).

5 -2- financing IDA S forgone credit reflows. They stressed the importance of ensuring that the financing cost of the Initiative should not compromise IDA S financial strength and capacity to support low income countries in the medium and long term. 5. To this end, donors committed themselves to fully finance the costs to IDA of providing MDRI debt relief over the 40-year time span of the MDRI. They agreed that financing of MDRI costs should be fully additional to regular IDA contributions in order to provide the greatest benefit to poor countries and preserve IDA S financial strength. They agreed that the level of IDA14 donor contributions, measured in real terms, will serve as the baseline on which the additionality of donor financing for the MDRI will be assessed over time. They recognized that the ability to provide binding financial commitments for the entire duration of MDRI varies from donor to donor, and committed themselves to make every effort possible to translate their full political commitment for the outer as well as earlier years into as firm and far-reaching financial pledges as allowed for by their legislative processes. 6. This report records the conclusions and recommendations agreed by the Participants. Specifically, the report sets out principles to guide the implementation of the MDRI in IDA and establishes the financing framework for donors, including by recording the pledges donors have made to IDA to finance the Initiative. 7. The report is organized as follows. Section I1 summarizes the key features of the MDRI. Section I11 summarizes the proposed implementation modalities or debt cancellation by IDA. Section IV describes the arrangements for financial compensation by the IDA donors. Section V sets forth the Participants request to the Executive Directors to recommend to the Board of Governors the adoption of the draft MDRI Resolution (see Annex 3). 11. KEY FEATURES OF THE MULTILATERAL DEBT RELIEF INITIATIVE 8. The MDRI provides a framework that commits to achieve two objectives: deepening multilateral debt relief to HIPCs while safeguarding the long-term financial capacity of IDA and the African Development Fund (AfDF); and encouraging the best use of 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. 9. The MDRI calls for 100 percent cancellation of IDA, AfDF and International Monetary Fund (IMF) debt for countries that reach the HIPC completion point.5 Eighteen completion point HIPCs would benefit from debt relief upon confirmation of eligibility; the remaining 10 interim and 10 pre-decision point HIPCs would become eligible once they reach completion point. Additional countries may qualify for the HIPC Initiative under the sunset clause extension, and could thus eventually become eligible under the MDRI once they reach their completion points. 10. The MDRI also commits to providing additional resources, to ensure that the financing capacity of the IFIs is preserved. The Development Committee stressed the need for an It does not cover debts owed to the IBRD, the African Development Bank, or other MDBs such as the Inter- American Development Bank. Differently from the HIPC Initiative, the MDRI does not include debt relief by any bilateral and commercial creditors.

6 -3- interdependent package consisting especially of dollar for dollar compensation for IDA that i s 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, 2005, 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 Participants recognized that 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 will be allocated to all IDA-only countries (except gap countries, which in this context are defined as IDA eligible countries with per capita incomes that have been above IDA S operational cutoff for more than two consecutive years) according to IDA s performance-based allocation (PBA) system. This feature helps maintain the link between IDA resource transfers and country performance IMPLEMENTATION MODALITIES FOR DEBT CANCELLATION 12. Participants discussed the three major criteria in determining the scope of debt relief under the MDRI: (i) the cutoff date of eligible debt stock; (ii) the credit coverage of the debt to be cancelled; and (iii) the group of countries to be covered under the MDRI. These criteria are important in determining the entire framework of the MDRI and of particular significance to Participants because of their impact on cost and financing of the MDRI. Participants concluded that the approach to be followed under the MDRI should strike a reasonable balance between providing the largest possible benefits from debt cancellation while containing donor costs within manageable bounds. 13. Participants agreed to recommend the following three criteria. Debt stocks as of December 31, 2003 will be eligible for cancellation by IDA under the MDRI.~ Eligible debt stocks will be defined as debt outstanding and disbursed as of this cutoff date, in line with the definition applied under the Enhanced HIPC Initiative. Eligible countries will include the 38 countries currently classified as HIPCs as well as four potentially eligible IDA countries that may qualify as HIPCs by end-2006 under the HIPC sunset clause. The four countries are Eritrea, Haiti, the Kyrgyz Republic and Nepal. Participants noted that the assessment of eligibility and intentions of a further group of countries that may qualify as HIPCs under the HIPC sunset clause - Bangladesh, Bhutan, Sri Lanka and Tonga - will take time.* They agreed that consideration of the status of these countries should be deferred to a later stage, with many Participants supporting the principle of an equitable approach. The text of the G-8 letter is provided in Annex 1.1. Section 1V.G of this paper discusses in detail how the contribution baseline to measure additionality of donor financing is determined. Various cutoff dates had been under consideration by the donors, including end-2003, end-2004, and mid By April 2006, 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.

7 Participants noted that the estimated costs of IDA from debt cancellation under the MDRI, based on the above-mentioned parameters, would be equivalent to about USD 37 billion (SDR 24.8 billion). Annex 2.1 provides details of estimated costs to IDA in SDR terms, by group of HIPC countries and by fiscal year. Annex 2.2 shows the expected volume of debt relief by IDA country. Annex 2.3 shows the assumed timing of HIPC countries reaching their completion points. Participants also reviewed the methodology for estimating and updating IDA S costs under the MDRI as well as the expected accounting treatment in IDA S financial statements. 15. Participants discussed the process for confirming the eligibility of each HIPC country under the MDRI. They agreed that the standards used at HIPC completion point provided adequate conditionality, including on governance, accountability and transparency. For the benefits of the MDRI to fully materialize, MDRI recipients will need to maintain sound performance standards, including in the areas of governance and public expenditure management, to ensure that savings from debt relief and other development resources are used productively for social and economic development. They noted that the MDRI provides an opportunity for substantial progress and urged beneficiary countries to make maximum use of that opportunity. Some participants requested monitoring by the World Bank of fiscal and financial management standards in recipient countries, to ensure that beneficiary countries achieve the intended development benefits. 16. Participants noted that the MDRI will give beneficiary countries an opportunity to reduce debt payments very substantially and secure additional resource flows to help countries attain their MDGs. They pointed out that trade liberalization could make a substantial contribution to ensuring that the economic potential of debt cancellation be realized. They also noted that 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 took place from non-concessional sources, debt levels could soon again become unsustainable. At the request of IDA Deputies, considerable work has already been done in this area and a related paper focusing on free-riding behavior in the context of IDA14 grants has been issued for discussion by the Executive Directors in mid-march Participants noted that the MDRI would amplify these free-riding issues and therefore attached great importance to the analytical work which the Bank is undertakmg in this respect. Participants requested that the analytical work would, inter alia, consider mechanisms for monitoring future debt accumulation, including through loans from other IFIS, export credit agencies and other bilateral sources, and identify possible options to deal with free-riding issues. A. Description of the Contribution Process IV. FINANCING ARRANGEMENTS 17. Participants agreed that the additional resources from donors for financing IDA S cost of providing debt relief under the MDRI will be added to IDA S resources following broadly the established procedures for regular IDA replenishments. Therefore, donors will contribute to a separate increase in resources to finance debt relief costs. IDA Countries and Non-Concessional Debt: Dealing with the Free Rider Problem in the Context of IDA Grants, IDA/SecM , February 16,2006.

8 Following the procedures used in regular IDA replenishments, Participants agreed that donors will contribute to this increase in resources by submitting one or more Instruments of Commitment (IoC) to IDA for their compensatory contributions under the MDRI. In view of the long-term nature of the financing commitments required, the Instrument of Commitment would be amended over time to reflect updated cost estimates as well as additional donor commitments as these become available. Under a resolution of IDA S Board of Governors (see Annex 3), donors will, as in past replenishments, be able to provide for their subscriptions and contributions as Unqualified Commitments. In addition, when needed, a Qualified Commitment could also be provided. In regular replenishments of IDA, a Qualified Commitment has been 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 20 years, a Qualified Commitment under this replenishment may, on an exceptional basis, be subject to necessary parliamentary or legislative approvals. For such Qualified Commitments, donors undertake to exercise their best efforts to obtain such parliamentary or legislative approvals for the full amount of the subscription and contribution. 19. Participants agreed that the financing of IDA S debt relief costs under the MDRI could be secured over three time periods so as to reflect legislative and other constraints of different donors. Participants noted that the bulk of the financing required will be for costs during the third time period. (a) (b) Remaining IDA14 period (FY07-08). It will be critical to provide an Unqualified Commitment for subscriptions and contributions in FY07 and FY08. lo Participants recognized that IDA S commitment authority depends on these resources being provided on time to maintain the volume of IDA14 commitment authority approved by the Executive Directors in June Le., the resources allocated to IDA countries over FY07 and FY08. Remainder of the first decade (FY09-FY 16). Firm, Unqualified Commitments are also needed over this period. Participants recognized that some donors would require periodic approval of their contributions over this period, resulting in the provision of some portion of Qualified Commitments. Participants stressed the importance of receiving 100 percent of forgone credit reflows due to the MDRI for this time period. Since, under the Advance Commitment Scheme, IDA is committing credit reflows in advance of receipt, the availability of firm financing commitments until FY 16 will provide assurances that resources would be available as envisaged for IDA S disbursements through 2015, which leads up to the target year for reaching the Millennium Development Goals. Participants encouraged IDA s donors to take all necessary steps in successive replenishments to provide firm financing on a rolling basis. This would support IDA s Advance Commitment Scheme and maintain IDA s commitment authority in future replenishments. Participants also requested IDA Management to explore lo It might be possible for some donors to apply resources made available through acceleration of encashment of their regular contributions under the IDA13 and IDA14 replenishments, in order to fulfill their obligations under this first phase of the IoC. IDA14 Commitment Authority Framework (FYO4-FYOS), IDAIR , June 8,2005. I

9 -6- other options to maximize the flexibility of IDA S financing framework to ensure that IDA S commitment authority is not impaired, even if less than 100 percent of unqualified financing commitments will be available over the first decade. (c) Subsequent 3 decades (FY 17- FY44). Participants acknowledged the indications from a number of donors that legislative processes are underway to authorize commitments over the subsequent 3 decades. They also discussed the challenges of securing parliamentary or legislative approvals for contributions that span such long periods. They invited donors to provide firm commitments, recognizing that many donors would be able to provide Qualified Commitments only. Participants welcomed that various donors had stated an intention to provide governmental approval for the full 40 years. A number of donors noted that there were legislative constraints on their governments capacity to make firm financial commitments over such a long-term period. Despite these different circumstances, Participants expressed their strong commitment to the Initiative; they pledged to make every effort possible to translate donors full political commitment for these outer years into as firm and far-reaching financial commitments as their country systems would allow. 20. Participants agreed that, due to the long-term nature of the commitments undertaken by IDA donors, each member s IoCs will provide confirmation that all necessary approvals have been obtained for the amounts committed, except for necessary parliamentary or legislative approvals in respect of Qualified Commitments, and that the IoC constitutes a binding obligation of the member country in accordance with the terms of the Resolution. Table A illustrates the estimated compensation schedule for IDA S donors, broken down into the three time periods. IDA s forgone reflows under the MDRI are denominated in SDRs. Contributions for each individual donor in national currency will depend on burden shares and foreign exchange reference rates agreed by the donors. 21, As the cost of IDA s debt relief provided under the MDRI will fluctuate over the 40 year period, the financing arrangements include a mechanism to adjust the amounts payable, over time. The final amount of IDA S costs, and thus the final amount of debt relief contributions, will depend on the timing of HIPC countries reaching their completion points; the foreign exchange reference rates to be agreed under future IDA replenishments to determine donor contributions in national currencies; and the USD volume - as well as the SDR valuation - of future debt relief to be provided under the Enhanced HIPC Initiative. 22. Initially, donors will be asked to deposit one or more IoCs in an amount determined based on currently available cost estimates. Every 3 years, normally in conjunction with regular IDA replenishments, modifications to future amounts in the payment schedules under the IoC would be made to reflect updated cost estimates. The revised payment schedules would be based on each donor s commitment to cover a specific burden share of the total costs. In addition, recognizing that a donor may not initially be able to provide Unqualified Commitments or Qualified Commitments over the full 40 year period, the Instrument of Commitment could also be amended periodically to include additional commitments which would progressively reflect the donor s full share of the financing over time. Therefore, donors financing commitments will

10 -7- be subject to adjustment to provide the agreed principle of full financing of IDA s costs under the MDRI. Table A: Compensation Schedule for IDA Donors (SDR million) Period Fiscal Year la) Remaining IDA14 Period FY07 FY08 Sub-total [b) Remainder of First Decade FY09 FYlO FYll FY12 FY13 FY 14 FY15 FY16 Sub-total IC) Subsequent 3 Decades FY17-44 Estimated Costs ,721 19,529 Total Costs, FY ,796 Source: IDA staff estimates. B. Use of IDA13 Burden Shares 23. There was broad agreement on the use of the IDA13 burden-sharing framework as a basis for the increase in resources for the MDRI. In IDA13, the G-8 countries burden shares collectively accounted for percent of donor resources. Participants also agreed that the structural gap in IDA13 of 9.39 percent should be closed to achieve full financing of IDA S MDRI costs. With regard to the structural gap for the IDA14 period, most Deputies agreed to scale up their basic burden shares proportionately to cover their share of the gap. Individual G-8 countries also declared their readiness to help fill any remaining structural gap during that period. For the period after IDA14, Participants considered as well whether to scale up donor shares proportionally so as to close the structural gap. They agreed that further discussions would be held amongst donors on whether this should be achieved through additional contributions or from other sources of income. The burden-sharing framework may be reviewed by donors periodically, in conjunction with regular IDA replenishments. C. Effectiveness of the Increase in Resources for Debt Relief Costs 24. Participants discussed the effectiveness thresholds for the addition of donor resources to finance IDA s debt relief costs under the MDRI. They agreed that debt cancellation be made

11 -8- subject to effectiveness of the increase in resources for debt relief costs. The purpose of such a condition would be to provide assurance when debt cancellation i s implemented that most donor financing is in place to finance IDA S share. 25. Under IDA13 and IDA14, the effectiveness threshold was set at 60 percent of total donor contributions, to be provided through Unqualified and Qualified Commitments. Participants agreed to maintain this established threshold for the increase in resources for debt relief costs under the MDRI. The 60 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, 2006 (SDR 17,390 milli~n ~). ~ Nevertheless donors will continue to provide financing commitments for debt relief costs, with a view to providing IoCs, by IDA15, for at least 60 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). This would constitute a priority item on the agenda for the IDA15 discussions in In addition, to allow for predictability in operational planning during the remainder of the IDA 14 period, Participants recommended that at least 75 percent of donor contributions received for IDA s total projected costs in FY07 and FY08 (SDR 546 million) should be Unqualified Commitments before declaring the new increase in resources effective. Table B: Summary of Indicative Donor Pledges Financing Remaining IDA14 Remainder of First Subsequent 3 Costs for 18 CP Total MDRI Costs indications from Period Decade Decades HIP0 IDA donors (FY07-08) (FY09-16) (FY 17-44) (FY07-44) (F YO7-44) SDRm in% SDRm in% SDRm in% SDRm in% SDRm in% Firm Financing % 1, % % 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, % 19, % 24, % 17, % 27. Table B illustrates the current status of indicative pledges received from donors for financing of the MDRI (see Annex 2.4 and 2.5 for details). These pledges take into account the legislative constraints that many donors face on their government s capacity to make firm financial commitments now respecting the latter three decades of the MDRI (FY 17-FY44). Participants reaffirmed, however, their universal commitment to full financing based on as firm and far-reaching financial commitments for these outer years as country systems would permit. 28. The target date for the effectiveness of the increase in resources for debt relief costs is May 31,2006. See the table in Annex 2.2 for details on IDA s estimated MDRI costs by group of HIPC countries. l3 This recognizes that donors are undertaking legislative or other government decision-making processes to make appropriate unqualified or qualified commitments, and that for some these processes may take additional time.

12 -9- D. Payment, Encashment and Applicable Foreign Exchange Rates 29. Participants agreed that the contribution and payment arrangements for donors and nondonors will follow normal practices used in regular IDA replenishments. Donors will provide their contributions in the form of cash or promissory notes, in accordance with a payment schedule to be attached to the IoC. In general, payments will be due on January 15 of each year. Adjustments in the amounts due on each payment date will be made, normally at the time of a regular IDA replenishment, to reflect updated cost estimates. Subscription and payment arrangements for non-donors will allow for payment in three installments over a 40-year period. Similar adjustments will also be made to the amounts of these subscriptions over time. 30. The payment schedule attached to the IoC corresponds to an encashment schedule reflecting the timing of IDA S forgone credit reflows. The timing of encashments affects IDA S resource base. Donors may, with the agreement of IDA Management, adjust their payment schedule to reflect their legal and budgetary requirements and can indicate any special preferences in this regard to IDA Management when depositing their IoC. In exceptional cases, should unavoidable delays occur, the amount due from the affected donor would be adjusted to take into account any past payment delays by that donor and any related lost income to IDA. As is the case with regular donor contributions to IDA replenishments, IDA may also agree with any member on a revised payment schedule that yields at least an equivalent value to IDA. 31. Contributions will be denominated in national currencies, in SDRs, or, with the approval of IDA, in any convertible currency of another member country. For Unqualified Commitments, the specific currency of payment for each donor contribution will be determined as of the date of conclusion of the Deputies discussions (December 7, 2005) for MDRI compensation. This is necessary for IDA to be able to minimize its foreign exchange exposure by hedging donor contributions as soon as the increase in IDA S resources under the MDRI becomes effective. To help maintain the value of contributions from donors with high inflation rates, contributions from donors with a domestic annual inflation of 10 percent or higher in will be denominated in SDRs; this would be reassessed every 3 years, normally at the time of a regular IDA replenishment. 32. For the purpose of establishing the equivalence of value among different currencies and the SDR, the average daily exchange rate for the period April 1,2005, through September 30, 2005 will apply for contributions to compensate IDA for debt relief costs during the IDA14 period. Regarding the cost of debt relief arising during the IDA15 period and future replenishments periods, the foreign exchange reference rates to be agreed for these regular replenishments would normally apply. l4 For donors providing an Unqualified Commitment to cover debt relief costs beyond the IDA14 period, the changing foreign exchange reference rates - combined with changes in the underlying SDR cost estimates - would lead to a modification to the national currency contributions for debt relief costs in the outer years. E. Voting Rights 33. Following normal practices in regular IDA replenishments, voting rights will be allocated for subscriptions and contributions to finance costs associated with IDA S participation in the l4 In the event of a delay of a regular replenishment of IDA, donors could establish a separate set of foreign exchange reference rates, every 3 years, which would apply for financing of the cost of debt relief.

13 - 10- MDRI. In accordance with IDA s current voting rights system, each member will have the opportunity to maintain its relative share of voting rights in the Association (see Table 3 of the draft Resolution). Such additional voting rights will be recorded from time to time, normally at the time of the general adjustment of votes in the next regular replenishment cycle. In light of the relatively small adjustment necessary for the IDA14 period, voting rights for contributions during the IDA14 period will be recorded at the time of the IDA15 replenishment. Any updates in the amount of donor contributions to reflect current estimates of debt relief costs will also affect IDA s voting rights. Consequently, adjustments to members voting rights will be made every three years, normally in conjunction with IDA s regular replenishments. F. Commitment Authority 34. Participants noted that contributions made under IoCs will become available for commitment by the Association in accordance with the IDA commitment authority framework as approved by the Executive Directors. As in IDA s normal practice, contributions provided under Qualified IoCs will become available for commitment once they have become Unqualified. G. Baseline to Establish Additionality of Donor Financing 35. Participants welcomed the introduction of a contribution baseline to establish the additionality of donor financing to IDA. They stressed the importance of such financing as additional to donors regular financial support to IDA. 36. In IDA14, regular donor contributions amounted to SDR 10,193 milli~n. ~ In addition, donors have committed to meet the ongoing costs to IDA over time from grants and from the Enhanced HIPC Initiative. Implementing this commitment for the period covered by IDA14, donors agreed to provide SDR 1,160 million for HIPC compensation during IDA14 and SDR 470 million to cover forgone charges due to IDA13 grants With the contribution baseline set with reference to IDA14 regular contributions and assuming an inflation rate of 2.0 percent per annum for the SDR basket of currencies, regular contributions in IDA15 would increase by 6.12 percent over each donor s regular contribution to IDA14 in SDR terms. This would lead to an aggregate contribution baseline for regular contributions of SDR 10,817 million in IDA15. That amount would continue to increase by the SDR inflation rate for subsequent replenishments. The actual SDR inflation rate over the preceding 3 years would be used to determine the baseline volume of regular contributions in each future replenishment. 38. Participants agreed that compensatory financing of IDA s forgone credit reflows due to the MDRI will be additional to this contribution baseline. The financing framework of future replenishments will also include the previously agreed special financing items referred to above, viz., compensation for IDA s HIPC-related costs and financing of forgone principal reflows due to IDA grants. l5 Donors also provided SDR 495 million of supplemental, incentive, and accelerated contributions in IDA Financing of forgone charges on IDA13 grants was a one-off cost item for donors. Starting in IDA14, donors agreed that IDA recover forgone charges due to IDA grants through a volume discount on grants. Donors also committed to compensate IDA for forgone principal reflows due to the making of grants in IDA13 and IDA14. In view of the 10-year grace periods on IDA credits, forgone principal reflows due to grants made in the IDA13 period (FY03-05) would start by FY13, which falls into the IDA16 period (FY12-14).

14 The agreed contribution baseline would be indicative in nature and intended to demonstrate transparently the delivery by donors on their strong commitment to the additionality of debt relief financing. The aggregate level of successive IDA replenishments will ultimately depend on each member s sovereign decision on its future contributions to regular IDA replenishments. The agreed contribution baseline will provide a basis for mutual accountability among donors, and an important public signal of donors commitment to ensure debt relief financing as clearly additional to regular contributions. H. Monitoring of Donor Contributions 40. Participants agreed that there should be ongoing monitoring of donor contributions to the MDRI. For transparency, donor contributions will be recorded separately from regular IDA replenishment contributions, as additional to donors normal financial support to IDA. Contributions for debt relief compensation will be monitored and reported regularly in IDA S financial statements, which will contain information on the volume of debt relief delivered and the amount of compensatory donor resources received under the MDRI. 41. The monitoring will be carried out against the amount of donor contributions required based on the political commitment for full financing of IDA S costs over the entire duration of the h4dri. Tables 2a and 2b of the draft Resolution show the increase in IDA S resources, assuming the application of basic IDA13 burden shares for the period after IDA14 for most donors. A number of donors indicated their intention to apply their scaled-up IDA13 burden shares for the 40-year period, while others did not (see also Annex 2.4 and 2.5 for the current status of indicative financing pledges). V. CONCLUSIONS AND RECOMMENDATION 42. Participants reaffirmed their commitment to the MDRI and its objective of assisting poor countries in achieving the MDGs. Participants also reiterated the view that IDA S central role in development assistance should be sustained and enhanced, and that its financial strength should be preserved. They concluded that debt cancellation under the MDRI, appropriately financed, would enhance IDA S contribution to development, and recommended that IDA proceed with the debt cancellation on the basis of full financing of IDA S debt relief costs over time. In particular, they emphasized the importance of securing financing commitments covering at least 60 percent of MDRI costs for all eligible HIPC countries by IDA15; progress to that end would be the first order of business for the IDA15 discussions. They affirmed their unanimous commitment to provide MDRI financing additional to donors regular support to IDA in real terms with IDA14 as the baseline, and they emphasized that this commitment should be sustained over the entire 40-year period of IDA S forgone credit reflows. 43. On this basis, Deputies proposed that the Executive Directors recommend to the Board of Governors the adoption of the draft Resolution to increase IDA S resources attached in Annex 3.

15 - 12- Annex 1 - Background Documents Annex 1.1 Letter to the President of the World Bank from the G-8 Finance Ministers on the G-8 Debt Proposal, Washington, DC, September 23,2005 Annex 1.2 Excerpts from Development Committee CommuniquC, Washington, DC, September 25, 2005

16 ANNEX 1.1 Letter to the President of the World Bank from the G-8 Finance Ministers On the G-8 Debt Proposal, Washington, 23 September 2005 Dear President Wolfowitz G-8 Finance Ministers have agreed a proposal to complete the process of debt relief for Heavily Indebted Poor Countries by providing additional development resources which will provide significant support for countries' efforts to reach the goals of the Millennium Declaration (MDGs). This proposal was reaffirmed by G-8 Heads of State and Government at Gleneagles. We believe that this proposal will bring major benefits to IDA'S membership; that it will preserve and enhance the Bank's key role in supporting low-income countries; and that it will ensure that substantial additional resources are allocated on the basis of need, governance and the ability to use them effectively for poverty reduction and growth. The key element of the proposal is that debt relief will be fully financed to ensure that the financing capacity of International Financial Institutions is not reduced. For this reason, in IDA and the AfDF, the G-8 has committed, based on agreed burden shares, to cover the full cost to offset dollar for dollar the forgone principal and interest repayments of the debt cancelled for the duration of the cancelled loans. This letter reaffirms and sets out the detail of our commitment. We will make available immediately additional funds to cover the full cost during the IDA 14 period and these funds will be fully additional to the resources already agreed during the IDA 14 replenishment. For the period after IDA 14, we are committed to cover the full costs for the duration of the cancelled loans and we will make contributions additional to regular replenishments of IDA. The G-8 has committed, as a whole, to the contribution it made under IDA 13 (70.19%). In order to create transparency and accountability, we ask that in future replenishment rounds that the costs of the debt relief initiative and the associated donor contributions be reported separately. We will each implement these commitments expeditiously in line with our individual budgetary and Parliamentary procedures. Indeed, since our meeting in June, and the meeting of G-8 Heads of State and Government at Gleneagles, a number of us have been able to make progress:

17 The US Administration has provided clear support for a Congressional Bill that would approve the debt relief initiative and to authorise "such sums as may be necessary for payment" for the full duration of the cancelled loans. 0 Japan reaffirmed its commitment to cover its share of the costs of the proposal and to exercise its best efforts to obtain necessary Diet approvals on the occasion of the regular replenishments to fulfill its commitment. 0 Canada has already made an allocation to cover its share of total costs over the next five years and is currently seeking Parliamentary approval to disburse these funds. The Canadian Government will seek Parliamentary approval to disburse funds over the life of the agreement following its normal budgetary conventions. 0 Germany confirms its commitments undertaken at Gleneagles. In particular, Germany remains committed to offset dollar for dollar, based on agreed burden shares, the foregone principal and interest payments of the IDA debt cancelled, subject to decisions to be taken by the new German Government and Parliament. 0 The UK is committed to cover its share of the costs for the full duration of the cancelled loans. It had already budgeted to pay its share of the debt service costs of these countries until 2015, and it will make a firm financial commitment to the cover its share of the full cost to IDA for the next ten years through a formal Parliamentary process. 0 France is committed to cover its share of the costs for the full duration of the cancelled loans. It will seek in 2005 Parliamentary appropriations for commitment for the financial compensation of the lost reflows. covering the period to Italy is committed to bring forward legislation that will authorize payments of its share of the cost for the full duration of the cancelled loans. 0 The Russian Federation confirms its commitment to cover its share of the cost for the full duration of the cancelled loans. Necessary steps will be taken by the Government to ensure the budget appropriations will be made in a timely manner. In addition, we reaffirm our commitment to the long-term role of IDA in the international development architecture and in financing development. In doing so we recognise that IDA will utilise a contribution baseline of the real value of donor contributions under IDA 14 as a means of assessing additionality. We also note that funding for IDA will continue to depend on donors' conviction of

18 IDA'S effectiveness in delivering development assistance; IDA reflows; and the performance, financing needs, and absorptive capacity of poor countries. On the basis of our commitments, and the actions we have taken and will take, we firmly believe that this initiative will strengthen the financial capacity of IDA. We strongly believe that this initiative represents a historic opportunity and we hope it will be seized by the whole membership at the Annual Meetings. [Signed by:] Gordon Brown, Chancellor of the Exchequer, United Kingdom John Snow, Secretary to the Treasury, United States of America Ralph Goodale, Minister of Finance, Canada Thierry Breton, Minister for the Economy, Finance and Industry, France Caio Koch-Weser, State Secretary, Ministry of Finance, Germany Giulio Tremonti, Minister of Economy and Finance, Italy Sadakazu Tanigaki, Minister of Finance, Japan Alexei Kudrin, Finance Minister, Russia

19 - 16- ANNEX 1.2 EXCERPTS FROM DEVELOPMENT COMMITTEE COMMUNIQU6 Relating to G-8 Proposal for 100 percent Debt Cancellation Washington, D.C., September 25, We met against the background of a series of major meetings in this Year of Development, in particular the United Nations 2005 World Summit held in New York on September These meetings, including the G-8 Summit held in Gleneagles in July, have resulted in significant progress in building and deepening consensus on key elements of the development agenda. In our discussions we focused on implementation and priorities for action. 5. We welcomed the G-8 proposal for 100 percent cancellation of debt owed by eligible heavily indebted poor countries (HIpCs) to the International Development Association (IDA), the African Development Fund (AfDF), and the International Monetary Fund, as providing a valuable opportunity to reduce debt and increase resources for achieving the MDGs. In order to expedite the implementation of the proposal, we agreed on the need for an interdependent package consisting especially of dollar for dollar compensation for IDA that i s truly additional to existing commitments and that maintains the financial integrity and capacity of IDA to assist poor countries in the future. We are agreed on the need for additionality of donor resources for debt relief to provide tangible benefits to HIPCs. We are confident that the package, including financing, the main technical features of the proposal and burden sharing on a voluntary basis will provide these benefits. We emphasized the importance of maintaining sound economic performance and good governance by eligible countries. We urged donor countries to ensure financing to fully compensate IDA for forgone reflows resulting from debt relief in order to reach a final agreement on the proposal. We welcomed the delivery commitments by the G-8 in their letter to the World Bank President. We asked the Bank to prepare a compensation schedule and monitoring system of all donor contributions urgently. On this basis we expressed our support for the aforementioned package and urged the Bank to proceed with the steps to ensure all necessary arrangements for implementation. 6. We also reviewed the implementation of the HIPC Initiative, welcomed continued progress in providing debt relief to HIPCs, noted the need to fill the current funding gap, and urged full creditor participation. We continue to underline the importance of the existing agreement that contributions under the HIPC Initiative be additional to other contributions to IDA, Eighteen countries have reached the completion point and another ten are between decision and completion points. We look forward to a final list of eligible countries in early 2006.

20 - 17- Annex 2 - Data Tables Annex 2.1 Annex 2.2 Annex 2.3 Annex 2.4 Annex 2.5 Estimated Costs to IDA under the MDRI Estimated MDRI Debt Relief by IDA Country Estimated Timing of HIPC Countries Reaching Their Completion Points Indicative Pledges to the MDRI - SDR millions Indicative Pledges to the MDRI - National Currency millions

21 Estimated Costs to IDA under the MDRI (SDR million) ANNEX CP HIPCs 10 DP HIPCs 10 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 NO7 235 FY FYo FYlO N N N FY N N Subtotal, to FY16 3, , c , , G ,013 1,052 7,283 FY FYl FY N FY N FY FY FY FY N FY FY FY N FY FY FY FY FY N N N N FY N FY FY ,042 1,134 1,159 1,151 1,132 1,135 1,141 1,107 1, ,120 1,212 1,237 1,228 1,207 1,206 1,207 1,174 1,105 1, ,09G 1,123 1j81 1,299 1,425 1,515 1,534 1,518 1,490 1,479 1,475 1,428 1,336 1,218 1, Total, FY ,390 4,087 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 1,2006. In addition, 8 of the 10 decision point countries are projected to benefit from MDRI debt relief during the third year of the IDA14 period, in NO8. 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 (-09-FYI l), 36 of the current HIPCs plus all of the 4 possible future HIPCs under the sunset clause are currently projected to benefit frommdri debt relief. Only two pre-decision point HIPCs are currently estimated to become eligible for MDRI debt relief by N12, at the beginning of the IDA16 period: Myanmar and Togo. By IDA16, all HIPCs are assumed to receive debt relief under the MDRI. The chart in Annex 2.3 illustrates these timing assumptions. (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 (= 100% of debt service to IDA minus HIPC debt relief). (a) SDR-denominated credits: MDRI relief is calculated as 100% 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 100% 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.

22 - 19- ANNEX 2.2 Estimated MDRI Debt Relief by IDA Country (SDR million) Recipient of MDRI Debt Relief IDA14 IDA15 IDA16 First Decade Total Relief FY07-08 FY09-11 FY12-14 FY07-16 FY07-44 Completion 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 (10) Burundi Cameroon Chad Congo, Dem. Rep. of Gambia, The Guinea Guinea-Bissau Malawi Sierra Leone Sao Tome and Principe 1/ Sub-total Pre-decision Point HIPCs (101 Central African Republic Comoros Congo, Republic of Cote divoire Lao People's Dem. Rep. Liberia MY- Somalia Sudan Togo Sub-total TOTAL, 38 HIPCS Sunset clause: rine-fenced (4) Eritrea Haiti Kyrgyz Republic Nepal Sub-total GRAND TOTAL, 42 COUNTRIES I , ,582 2, , ,255 1,898 1, , ,364 3,857 17, , , , ,216 1,858 5,043 23, , ,270 1,955 5,268 24,796 1/ Debt relief to Sao Tome and Principe i s less than SDR 1 million over the IDA14 period.

23 x I! c 2 L e n c t L m.- F b

24 Indicative Pledges to the MDRI - SDR million ANNEX 2.4.W % 0.61% 0.67% % 3.75% 4.14% % Czech Republic % 0.06% % 1.58% 1.74% % 0.60% 0.66% % 6.0% 6.62% 10.30% 11.37% 0.12% 0.13% 0.06% 0.07% 0.04% 0.04% % 0.20% % 0.10% 0.11% % 16.0% 17.66% 0.91% 1.00% % 0.14% 0.15% Luxembourg 2/ % 0.11% % 0.05% 0.06% 2.60% 2.87% New Zealand I1 0.12% 0.13% 3.52% 1.68% 415.') 1.68% 0.03% 0.03% 0.20% 0.22% Russian Fed % 0.09% Saudi Arabia 2/ % 0.44% 0.14% 0.16% Slovak Republic X 0.01% 0.01% 0.03% 0.03% 0.08% 0.09% 1.80% 1.99% % 2.62% 2.89% % 243% 2.68% 0.09% 0.10% United Kingdom 3/ % 11.19% % United Slates 2/ % 22.20% % Notes: Totals may not add up due to rounding. Amounts will bc updated aonually and adjusted every 3 yeam in conjunction with mguiilr IDA repleaislunents. I/ These CounUies have indicated they will exercise their brst efforts to provide at least a qualified commitment for the subsequent 3 decades (FY17-44). 21 These ceuntrics have iudicated they will wnlribute at their regular IDA13 burden shares, except for the US which applies specific shares forfyo7 and FY In heir letter dated September to the President of the World Bank, these countries have provided a political wmmiunent beyond the amounts shown abam which translate into the following additional indicative contributions: SDR 899m for Canada. SDR 1.933m for Germany, and SDR 3,1941" for hpan. 41 The G-8 countries have indiced the use of specific shares for FY07 and FY The commitment for the remeiuder of the first decade is shown as unqualilid, although llrr countq has indicated it is not yet in a position to make a firm mmmiunent. 91 Slovellia is included at i t IDA14 basic share. The country was not a donor in IDA13. 10IThe FYO7 anount is unqualified lo the extent of SDR 58.9 million.

25 Indicative Pledges to the MDRI - National Currency million ANNEX 2.5 Remaining ma14 Peruod Hemlnder of first dcmde Subsequent 3 decades Grand Total Donors FY07 FY08 FY07-08 IT09 FYI0 FYI1 W12 FYI3 FYI4 FYI5 FYI6 FY09-16 FY17-44 FYO7-44 Amnunt Sham Amnunt Share Amount Share Amunl Share AusUalla 11 ~~ % % % % Aurtr~r % % 0.(HI 000% % Bolgrum 21 & IOU8 1.55% % 3MI37 155% % Brazil Canada 3/41 Cmh Republic 21 Demvt Fin1.u-d France 3/41 Gcrnwny Greecc Hungary 21 leeland 1,rrld"d Irrrel Italy Jilpiln 3/41 Korea. Republic of Kuwait 61 Luxcrnbourg 2/51 Mexico Nclherlsndr Ncw%lund Norway Polmd 2/61 Ponural I1 RUES~W Fcd Saudi Arabia Singapore 61 Slovak Republic 21 Slovcoia I1 91 Soul Ahice Spain Sweden Swllzerland Turkey (m% W O.W United Kingdom 3/ % Unirul Stales % Totills may not add up due lo rounding. Amaunts will bc updated annually and adjusted every 3 years in conjunction with regular IDArepleoishmols. 11 There counuier have indicated they will exercise thcir bestetions to provide a1 leavt =qualified commitmot for lllr subsequent 3 decades (FY17-44). 21Thmc counuler have indicaed ley will wnrributc a1 heir rcgular IDA13 bvrdrn sllares, except for the US which applies rpeellic shares for FY07 and FY In their leser dated Septcmbcr to Ihe President ofthe World Bank, there cououier have provided a political commitment beyond thc munu rho- above which uamlate Into the following additional indicative conuibutions: CAD 1, for Canadq EUR 2.301m for Gamy, and JPY 515,527mforJapan. 41 The G-8 countries have indicated the use of specific shares for FY07 ad FY Thc conunitn~cnt for the rcrnaioder of the first decade is shown as unqualified, although le country has indicated it is not ye1 in a position to make a fm commitment. 61 The shares and type of commitment are indicative ad subject lo furllm decisions and eonfirmaion by donors 71 Canvihudons of countries with au average inflation rats exding 10% over the period would be dcoomioated in SDRs. 81 Asruning eonuibutionr will be denominated in USD. 91 Slovsnia Is Included a1 ils IDA14 bnslcshvc Theeaunuy war not a donor inida13. 10lThc NO7 amount Is unqualified to the extent of USD million. Ill Individual G-8 countries ddrclvrd their readinerr to fill any remaining rmcrural gap during the IDA14 pcriod. O.IKl% % 0.M 0.00% 3.96% % l,l % 0.00% O.(HI 0.00% 1lbM % 1.00% 295, % 374, % 0.25% ll15% % 0.10% ll.l0% (l.l0% 0.00% 0.m 0.00% 0.UO 0.00% 2.87% % % 0.13% % 1.68% 3, % 3, % 0.03% % 0.22% % 0.09% % % 0.1 1% % % 0.14% % % 0.01% % % 0.03% 1, % 2,121.W 0.03% 0.09% $~ % 1.99% % % 2.89% % 7, % 0.00% 0.00 O.O(I% 27.W 0.06% O.llO% OM) 0.00% u% 13.82% 2, % 2, % 20.12% 5, % 7, % 0.00% % ll.(hi 0.00% 26.67% % % F'X Rtference Currency w.trr 4/1/ NatCurrlSDR AUD EUR ElJR BRL CAD CZK DKK ' EUR EUR EUR EUR HUF ISK EUR ILS EUR JPY 1, KRW KWD EUR MXN EUR NZD NOK PLN EUR I.OOMX1 SDR USD SGD SKK SIT ZAR EUR SEK CHF I.oOWO SDR GBP USD r24rp3~@~&av>3?m4 -m..??m!b*?%