Debt Sustainability and Lending at the Asian Development Bank Operational Developments in 2013 and 2014 Sirpa Jarvenpaa Director Operational Planning and Coordination Division Strategy and Policy Department 6 May, 2014

Funding from the Asian Development Bank ADB finances activities in its developing member countries (DMCs) from two key sources: –Ordinary Capital Resources (OCR), offered at near-market terms to lower- and middle-income countries. –Special Funds, including Trust Funds, typically offered as concessional loans or grants to lower-income countries. The Asian Development Fund (ADF) is the largest Special Fund, aiming to help reduce poverty in ADB's poorest borrowing countries.

Current Classification of DMCs DMC (45) ADF-only (17) 100% grant (9) 50% grant, 50% loan (3) 100% loan (5) Blend (13) OCR-only (10) Graduate (4) Unclassified (1)

Eligibility for Access to the Asian Development Fund Borrowers' eligibility for ADF is based on: –1. per capita gross national income (GNI) below USD 1,205 at 2012 prices; and –2. insufficient creditworthiness for ordinary capital or market-based resources. Exceptions to the per capita income criteria are allowed for countries that are not considered creditworthy.

Borrowing from the Asian Development Fund ADF resources are allocated among eligible countries using Performance-Based Allocation (PBA) mechanism. ADF resources allocated for a country can be provided as grants or concessional loans. 20% volume discount is applied to grant portion of a country's PBA allocation. Current the 17 ADF-only countries are eligible for ADF grants, based on their debt distress conditions.

Importance of Debt Data as a Determinant of Lending Terms Debt data are used to assess creditworthiness, as input into eligibility for ADF / OCR resources. For ADF countries, grant shares are determined exclusively by a country’s risk of debt distress, using the International Monetary Fund and the World Bank framework. Risk of Debt DistressADF Grant Share High Medium Low 100% 50% 0%

Use of Debt Distress Classifications to Determine ADF Grant Shares As per ADB’s Policy, debt-distress classifications for ADF-only countries are reviewed annually. Available IMF-WB Debt Sustainability Analyses (often done in consultation with ADB) or available debt data form the basis for the review. If the debt distress classification changes after the first year of any biennial allocation period : –The country retains the original grant share, if the debt distress classification improves. –The country moves to a higher grant share, if the debt distress classification deteriorates.

Differences between ADF and IDA in 2013 Access to Concessional Finance (ADF / IDA) Asian Development Bank BlendADF only World Bank Blend Armenia, Georgia, Mongolia, Timor Leste, Pakistan, Papua New Guinea, Sri Lanka, Uzbekistan, Vietnam IDA only Micronesia, Bangladesh Afghanistan, Bhutan, Cambodia, Kiribati, Kyrgyz, Lao PDR, Maldives, Marshall Islands, Myanmar, Nepal, Samoa, Solomon Islands, Tajikistan, Tonga, Tuvalu, Vanuatu o Palau is ADB blend, but IBRD only. o Nauru is ADF only, but unclassified under IDA. o India is eligible for ADB blend status, but has never had access to ADF. Whereas, India is a blend country for the WB. o India, Armenia, and Georgia are expected to become IBRD-only effective July 2014.

Differences with IDA in 2013 Among the17 ADF-only Countries Debt distress thresholds used by ADB are based on ADB’s own Country Performance Assessment ratings. ADB and IDA debt distress assessments differ with variations in policy and institutional performance. IDA ClassificationsADF Classifications CountryCPIADebt Distress (2013) Grant Share (2014) CPADebt Distress (2013) Grant Share (2014) Lao PDRMediumModerate50%StrongLow0% NepalMediumModerate50%StrongLow0% KyrgyzMediumModerate50%StrongLow50% TongaMediumModerate50%MediumHigh100% BhutanStrongModerate0%StrongModerate50%

Changes in Debt Distress Ratings in 2013 For the ADB, debt distress ratings changed for four countries in CountryRisk of Debt Distress (2013) Risk of Debt Distress (2012) ADF Grant Share (2014) ADF Grant Share (2013) KyrgyzLow RiskModerate Risk50% Marshall IslandsHigh Risk-100%- SamoaHigh RiskModerate Risk100%50% TajikistanModerate RiskHigh Risk100%

Developments in 2013 and 2014 Brunei Darussalam became a DMC (without access to lending resources). It is currently unclassified. Marshall Islands was reclassified from blend to ADF-only, due to high risk of debt distress, with ADF access as 100% grant. Samoa was reclassified from 50% grant to 100% grant (within the category of ADF-only) due to risk of debt distress deteriorating from moderate to high, after Cyclone Evan. Azerbaijan was reclassified from ADB blend to OCR-only. Armenia and Georgia are expected to be reclassified from ADB blend to OCR-only in 2014, effective 1 January 2017, coinciding with the start of ADF XII replenishment period.

Issues for Discussion Is the current framework of using DSA / CPA the best way to determine grant shares?  Issues with country relations can arise, especially if changes in CPA lead to abrupt changes in grant shares.  In small countries where ADB / WB are major development partners, this can potentially lead to endogeneity problems (i.e., grant terms of our lending can affect the debt distress risk).

Issues for Discussion Is there scope to formally improve information flows between IMF/WB and regional development banks on DSA work?  Broad timetables on country-specific DSAs can be shared institutionally at the beginning of the year.  DSA team leaders can be encouraged to share data and results with regional banks (on a confidential basis), even prior to Board approval.

Other Issues for the Near Term What are the near term plans for reclassification of countries, for countries that are also ADB DMCs?  Sri Lanka, Mongolia and Viet Nam from IDA?  Kazakhstan and Malaysia from IBRD?  Bhutan from IDA-only to blend?  Any other?

Three Issues / Questions Is the current framework of using DSA / CPA the best way to determine grant shares? Is there scope to formally improve information flows between IMF/WB and regional development banks on DSA work? What are the near term plans for reclassification of countries, for countries that are also ADB DMCs?

For More Information Sirpa Jarvenpaa or Ananya Basu Web site: