1 ALM Seminar Consultation on the Seventh Replenishment of IFAD’s Resources– 3 rd Session Rome, 5 July 2005

2Content 1. Asset Liability Management (ALM) in IFAD  Current and proposed definition of committable resources 2. Track Record of Flows  Contributions, loan reflows, investment income, disbursements 3. Financial Scenarios  Cash inflows and outflows  Liquidity projections  Stress testing and financial soundness indicators 4. Comparing IFAD to IFIs  Financial soundness comparison  Liquidity policies  Use of future loan reflows and resource structure 5. Conclusions July 2005 – Third session of the Consultation on the 7 th replenishment of IFAD’s resources

3 Content of this section:  Role of ALM in IFAD  Current and proposed definition of committable resources  Proposed definition from legal perspective Section 1. Asset Liability Management (ALM) in IFAD

4 IFAD’s mission is to “Enable the Rural Poor to Overcome Poverty” IFAD aims to efficiently maximize resources available to its borrowing Member States while maintaining IFAD’s financial soundness This goal can be better achieved through dynamic management of IFAD’s committable resources within the context of Asset Liability Management

5 Definition of committable resources: Section 1. Asset Liability Management (ALM) in IFAD Current ACA maximum 3 years of future loan reflows Loans Outstanding Instruments of contribution receivables Promissory notes Cash & Investments 7th Replenishment up to 5 years of future loan reflows Loans Outstanding Proposed Instruments of contribution receivables Promissory notes Cash & Investments Total assets

6 Section 1. Asset Liability Management (ALM) in IFAD Use of future loan reflows for commitments:

7 Section 1. Asset Liability Management (ALM) in IFAD Current definition: Projected 7 th Repl. ( ) FX rate USD/SDR 1.45 Uses PDFF, Oper. exp. Sources Loan reflows (ACA) * Programme of Work (loans/grants) HIPC Contributions 7 th (Cash and promissory notes) USD (2 003) M USD (290) M USD (137) M Total: USD M USD (2 430) M USD (190) M Contributions 6 th Shortfall USD 800 M USD M USD 32 M USD 320 M Internal resources (Inv. income, loan reflows) *USD 320 M is based on USD 743 M (3 years future loan reflows ) less USD 423 M (projected 6 th Repl. ACA carry over)

8 Section 1. Asset Liability Management (ALM) in IFAD Proposed definition: Projected 7 th Repl ( ) FX rate USD/SDR 1.45 SourcesUses Contributions 7 th (Cash and promissory notes, Instr. of Contribution receivables) * USD is 5 years future loan reflows at 95% of principal, interest and net of HIPC Internal resources (Inv. income, loan reflows) Programme of Work (loans/grants) HIPC PDFF, Oper. exp. Future loan reflows* USD (2 003) M USD (137) M USD (290) M USD M USD (2 853) M Contributions 6 th Total: USD M USD 1100 M USD 167 M USD 32 M USD (423) M Surplus Net resource position end 6 th Repl USD 800 M

9 Section 1. Asset Liability Management (ALM) in IFAD Impact of a change in definition of committable resources: More committable resources More loans and grants approvals More disbursements Lower liquidity (more reflows in the future) Strategic liquidity management Reallocation of assets from investments to loans outstanding disbursements liquidity

10 Section 1. Asset Liability Management (ALM) in IFAD April’s questions on legal opinion on proposed committable resources definition:  Can IOC receivables and future reflows be legally included as committable resources?  Can also qualified IOCs be included in committable resources? IFAD is allowed to commit against IOC receivables and future reflows on basis of the “Agreement Establishing IFAD” (Article 4, Section 1): “ the resources of the Fund shall consist of funds derived or to be derived from operations or otherwise accruing to the Fund” IFAD is allowed to commit against IOC receivables and future reflows on basis of the “Agreement Establishing IFAD” (Article 4, Section 1): “ the resources of the Fund shall consist of funds derived or to be derived from operations or otherwise accruing to the Fund” Qualified IOCs could be included in committable resources when unqualified i.e. when Members’ appropriations have been obtained and other legislative requirements have been met Qualified IOCs could be included in committable resources when unqualified i.e. when Members’ appropriations have been obtained and other legislative requirements have been met

11 Section 2. Track Record of Flows April’s questions on IFAD’s financial flows:  Have Members fulfilled their obligations against IOCs?  What is the actual track record of loan arrears? Content of this section:  Overview of cash flows  Track record of flows: Contributions Contributions Loan reflows and arrears Loan reflows and arrears Investment income Investment income Disbursements Disbursements

12 Section 2. Track Record of Flows Cash inflows Cash outflows Loan reflows (principal,interest/ service charges) Contributions Investment income Loan and grant disbursements HIPC foregone reflows Operating expenses and PDFF Overview of cash flows:

13 Section 2. Track Record of Flows Track record of contributions (as at Dec 2004): record of encashments compared to deposited IOCs is almost 100%! Track record of encashments compared to deposited IOCs is almost 100%!

14 Section 2. Track Record of Flows Track record of loan reflows:  In 2004, loan reflows reached the level of USD 220 M (of which 78% principal repayment and 22% interest/service charges) Loan reflows have represented a stable and growing cash inflow

15 Section 2. Track Record of Flows Track record of loan arrears (of 75 days or more):  At Dec 2004, total arrears amount USD 81 M a), representing 3.1% of total amounts billed of total amounts billed  83% of arrears is concentrated in only five countries Total loan arrears are very low (3.1 % of total billed) and are concentrated in only few countries a) USD 12 M is covered by HIPC debt relief

16 Section 2. Track Record of Flows Track record of investment income:  Stable expected return of 3.5% with current investment policy Track record of disbursements:  Total loan and grant disbursements reached USD 332 M in 2004

17 Section 2. Track Record of Flows Summary of IFAD’s track record of flows:  The proposal to include IOCs receivables and a portion of loan reflows in the committable resources is supported by:  Excellent track record (almost 100%) of encashments compared to deposited IOCs  Stable and growing loan reflows  Very low loan arrears (at 3.1% of total billed) concentrated in only few countries

18 Section 3. Financial Scenarios April’s questions on financial scenarios:  What are the annual, projected cash inflows and outflows for the 7 th Replenishment and beyond?  What is meant by an acceptable limit of risk for liquidity? Can it be quantified?  What are the financial indicators of the scenarios? Content of this section:  Projections of cash inflows and outflows  Liquidity projections  Stress testing  Financial soundness indicators

19 Section 3. Financial Scenarios Assumptions applied in a “Base scenario”:   After 7th Repl. Period: neutral assumptions have been made on Replenishment and Programme of Work levels for scenario purposes only 7 th Repl From 2010 Replenishment amount USD 800 M Growth at inflation rate Programme of Work (POW) - current grant policy 10% Growth at 10% p.a. Growth at inflation rate until 2015 Committable resources considered Includes IOC receivables and 95% of 5 years of future loan reflows (net of HIPC) Includes IOC receivables, 95% of future loan reflows (net of HIPC) subject to sustainable liquidity FX rate USD/SDR 1.45 (current and 3-year-average rate) 1.45 (current and 3-year-average rate) 3-year-average rate)

20 Section 3. Financial Scenarios “Base scenario” compared to information in April 2005:  USD/SDR rate updated to 1.45 to reflect recent trends (Previous “Base” assumption: as at 31 Dec 2004)  Estimates of HIPC debt relief updated to most recent figures (Estimates subject to change. HIPC contributions per Dec Previous “Base” assumption: HIPC debt relief estimates per March 2005)  After 7 th Repl. period, a “neutral” assumption about Replenishment and POW levels for scenario purposes: annual growth at inflation rate (POW growth is assumed until 2015) (April’s additional scenario information showed two possible trends for 8 th Replenishment: annual POW growth of 10% or 8% in and 8 th Replenishment level of USD M or USD M respectively)  More conservative approach in liquidity projections by applying a 3% annual reduction on all future loan reflows

21 Section 3. Financial Scenarios * “Base scenario” assumptions per page 19 Projected cash inflows in assumed “Base scenario” *: Investment income decreasing due to gradual reallocation from investments to loans outstanding Annual loan reflows projected to increase some 30% by 2015 and could double in 20 years (figures gross of HIPC foregone flows, which are shown as expense outflows)

22 Section 3. Financial Scenarios Projected cash outflows in assumed “Base scenario” *: - (800) (600) (400) (200) USD M HIPC - - (11) (42)( 48) (44) (38) (34) (28)(22)(20) PDFF (27) (30) (31) (34)(38) (40) (41)(42) (43) (44) Operating Exp. (57) (63) (69)(71)(74) (83)(84)(86)(88)(89)(91)(93) Disbursements (332) (420)(413) (417) (423) (438) (462) (489) (515) (540) (565) (589) * “Base scenario” assumptions per page 19 Annual disbursements projected to increase significantly in 10 years and could double in 20 years

23 Section 3. Financial Scenarios Projected liquidity (cash, investments) and net flows in assumed “Base scenario”*: * “Base scenario” assumptions per page 19 After 2015, the “Base scenario” could reach a minimum liquidity in 2023 (USD 1.0 B), thereafter recovering due to larger loan reflows Liquidity shows a gradual yet sustainable decrease (USD 1.6 B in 2015)

24 Section 3. Financial Scenarios Stress testing: What? Scenarios showing the projected future impact from changes in assumptions or from shocks Why? To check adequacy of long-term liquidity How? By simulating the impact of stress scenarios relating to IFAD’s major financial flows: a)Disbursements b)Encashment of contributions c)Loan reflow arrears d)Movement on foreign exchange (overall impact)

25 Section 3. Financial Scenarios Stress scenarios: a)Acceleration of loan/grant disbursements (approvals from 2005): Loans: last 18% accelerated to disburse within 8 years Loans: last 18% accelerated to disburse within 8 years Grants: last 25% accelerated to disburse within 3 years Grants: last 25% accelerated to disburse within 3 years b)Delayed encashment of contributions (7 th Repl. onwards): Encashment over 8 years from 1 st year of replenishment period (“Base” assumption: 6 years) Encashment over 8 years from 1 st year of replenishment period (“Base” assumption: 6 years) c)Increase in annual loan arrears (2005 onwards): From 2005, annual loan arrears at 8% (“Base” assumption: 3%)From 2005, annual loan arrears at 8% (“Base” assumption: 3%) d)5% decrease in USD/SDR rate (8 th Repl. onwards): USD/SDR rate at 1.38 i.e. average rate since Jan 2001USD/SDR rate at 1.38 i.e. average rate since Jan 2001 (“Base” assumption: 1.45) (“Base” assumption: 1.45) Note: HIPC debt relief of 100% could represent an additional, Note: HIPC debt relief of 100% could represent an additional, future scenario future scenario

26 Section 3. Financial Scenarios Impact on liquidity of stress scenarios: After 2015, all stress scenarios reach minimum liquidity levels around 2024 and then recover All stress scenarios show lower yet sustainable liquidity compared to the “Base scenario” (2015: a gap of up to approx. USD 700 M) USD M Gap to “Base” (USD M) Gap to “Base” (USD M) Liquidity in 2015 (USD M) Liquidity in 2015 (USD M) Accel. Accel. disb. (a) disb. (a) Delayed encash.(b) Delayed encash.(b) Decrease USD/SDR rate (d) Increased arrears (c) “Base “Basescenario”

27 Section 3. Financial Scenarios Summary of the “Base scenario” and stress scenarios:  The assumed “Base scenario” (with 7 th Repl of USD 800 M) shows a gradually decreasing yet sustainable liquidity with the proposed definition of committable resources (which used more future reflows for commitments)  Four stress scenarios show lower yet sustainable liquidity levels; an estimated liquidity reduction of up to approx. USD 700 M by 2015 compared to “Base scenario”  Actual materialization of stress events would call for cautious and timely adjustments in resources and/or operations  New scenario simulations are required when there are:  changes in actual situation (“Base scenario”)  risks of new stress events and/or multiple events

28 Section 3. Financial Scenarios Indicators of financial soundness for IFAD: With proposed definition of committable resources, liquidity: Projection: 10 years (2015) 37%30%20%54%65%75% Projection: end 7 th Repl (2009) Actual: Dec 2004 Loans outstanding vs Total assets Liquidityvs Liquidityvs Annual disbursements (incl. operating exp. and PDFF) Liquidityvs Total undisbursed balance decreases in favour of higher level of loans outstanding (more in line with IFAD’s mission) continues to adequately cover annual disbursements Note: Liquidity takes investments (receivables and payables) into account

29 Section 4. Comparing IFAD to IFIs April’s questions on comparison to International Financial Institutions (IFIs):  How many years of future reflows do IFIs include as resources?  Which proportion (85%? 100%?) of annual, future loan reflows (principal and interest) do IFIs include as resources?  Does IFAD have any resource transfer from a Bank, like IFIs? Content of this section:  Financial soundness indicators  Liquidity policies  Use of future loan reflows  Breakdown of total resources

30 Section 4. Comparing IFAD to IFIs Financial soundness indicators: 11%16%19%13%37%30%20%82%73%72%63%54%65%75% Loans outstanding vs Total assets Liquidityvs Liquidityvs Annual disburs. (incl. oper. exp, PDFF) Liquidityvs Total undisbursed IDA 2004 FSO 2004 AsDF 2004 AfDF 2004 IFAD Dec 2004 End 7 th Repl (2009) In 10 years (2015) With the proposed definition of committable resources, IFAD is still more conservative but moves closer to IFIs by the 7 th Repl Note: Liquidity takes investments (receivables and payables) into account

31 Section 4. Comparing IFAD to IFIs How do IFIs define their liquidity policies (minimum liquidity)? IDA “Percentage (set each year) of moving average of previous, current, and following year’s disbursements” FSO “USD 500 M” AsDF “No specific target, but minimum liquidity generated by Expanded ACA model must be no less than 20% of next year’s disbursements” “Operational liquidity must be 50% to 75% of 3-year moving average of net disbursements” AfDF IFIs: generally, minimum liquidity is set as a proportion of annual disbursements. Also long-term projections are considered IFAD: no specific liquidity target

32 Section 4. Comparing IFAD to IFIs Number of future reflow years % of future annual principal % of future annual interest IFIs (IDA, FSO, AsDF, AfDF) Unlimited subject to liquidity policy From 85% to 100%: IDA: 95% IDA: 95% FSO: 100% FSO: 100% AsDF: 85% AsDF: 85% AfDF: 85% AfDF: 85% 100%* 100%* IFAD: proposal 7 th Repl 7 th Repl: up to 5 years (gradual increase) 7 th Repl: up to 5 years (gradual increase) 95% 95% Proportion of future loan reflows included as resources: IFAD: more conservative IFAD: in line IFAD’s proposed use of future loan reflows is in general more conservative than IFIs’ practice * mostly earmarked for specific expenses

33 Sample comparison of total resources to commitment level: IDA:  higher proportion of contributions  transfer from parent bank (IFAD has no parent bank)  future compensation for foregone reflows due to grants  access to HIPC Trust Fund with the World Bank IDA 14 th Repl. (Commitments SDR 23.7 B) Contributions IFAD 7 th Repl. Proposal (Commitments USD 2.0 B) Internal resources (reflows, inv. income) 73.9% 60.0% 40.0% 42.2% Incl. bank transfer 57.8% Transfers from parent Bank IFAD is depending more on internal resources Section 4. Comparing IFAD to IFIs

34 Section 5. Conclusions An expanded definition of committable resources is proposed as a result of financial analyses. This proposed definition requires future strategic liquidity management. Conclusions:

35 Expansion of committable resources: Expansion of committable resources: It is proposed to include IOC receivables and up to 5 years of future loan reflows (95% of principal and interest and net of HIPC foregone reflows). Proposal supported by:  Excellent track record of encashments compared to deposited IOCs and stable, growing loan reflows with very low arrears  Long-term financial scenarios and stress scenarios project a lower yet sustainable liquidity, which would cover the gradually increasing disbursements  Financial soundness indicators would remain with a margin of prudence and would become closer to IFIs indicators  More strategic matching of inflows and outflows by using the tools of the ALM framework (liquidity scenarios, stress testing, financial soundness indicators) Conclusions (cont’d): Section 5. Conclusions