the rural rural poor poor toovercome poverty enabling Asset Liability Management Framework Consultation on 7 th Replenishment – 2 nd Session Rome, April 2005

the rural rural poor poor toovercome poverty enabling Recommendation from Consultation on 6 th Replenishment Consultation on 6 th Replenishment Review of Investment Policy in 2003: Security of Investments Periodic Reporting to Executive Board Asset Liability Management (ALM) ALM Review December 2003: Endorsed by Executive Board 4 Action Points June 2004: Executive Board Informal Seminar on Implementation Status 2

the rural rural poor poor toovercome poverty enabling Asset Liability Management (ALM) Asset Liability Management (ALM):  The ongoing process of formulating, implementing, monitoring and revising strategies on assets and liabilities to achieve an organization’s financial objectives, given the organization’s risk tolerances and other constraints Goal of IFAD ALM:  Optimize the use of resources by maximising loan and grant approvals while minimising financial risks 3

the rural rural poor poor toovercome poverty enabling Implementation of ALM Framework: 4 Action Points  Action 1: ALM section created in Treasury Focal point for IFAD’s ALM functionality Expanded financial model to align it to ALM framework  Action 2: Reduced currency risk Elimination of unhedged currency exposures  Action 3: Reduced market risk Liquidation of remaining equities portfolio Liquidation of remaining equities portfolio An allocation to Held-to-Maturity investments An allocation to Held-to-Maturity investments  Action 4: Definition of committable resources Proposal for 7 th Replenishment discussions Proposal for 7 th Replenishment discussions 4

the rural rural poor poor toovercome poverty enabling Financial Resource Management and the Definition of Committable Resources Current practice:  Full upfront financial backing: Committable resources include cash, investments and promissory notes  Advance commitment authority (ACA): Maximum 3 years of loan reflows (6 th Replenishment resolution) 5

the rural rural poor poor toovercome poverty enabling Financial Resource Management and the Definition of Committable Resources (cont’d) Proposed ALM definition of committable resources:  Include contributions receivables and portion of loan receivables (both net of allowances) Advantages:  Increases new loan and grant approvals  Calibrates liquidity to meet disbursement requirements (loans, grants, administrative expenditures)  Uses earlier Members’ contributions more efficiently (contributions receivables but also loan repayments)  Benefits from 28 years track records (only 2.7% of loans require an allowance)  Reallocates assets from investment portfolio to loans outstanding 6

the rural rural poor poor toovercome poverty enabling Financial Resource Management and the Definition of Committable Resources (cont’d) BALANCE SHEET 31 December 2004 Cash & investments Promissory notes (net) 270 Contrib. receivables (net) 258 Other receivables 154 Loans outstanding (net) TOTAL ASSETS Payables & liabilities 264 Undisbursed grants 36 Contributions Fully committed retained earnings General Reserve 95 TOTAL LIABILITIES, CONTRIBUTIONS, RETAINED EARNINGS COMMITTABLE RESOURCES Current Current Definition Definition Cash & investments Promissory notes (net) 268 Contrib.receivables (net)- Other receivables 154 Loans outstanding (net)- TOTAL ASSETS Less- Payables, liabilities and PDFF 268 General Reserve 95 Undisbursed loans and grants NET RESOURCES (137) ACA approved by EB 137 ACA ceiling 653 Unused ACA 516 ProposedDefinition n.a.n.a.n.a. 7

the rural rural poor poor toovercome poverty enabling Comparison of IFAD with other IFI’s IFAD generally has a more conservative approach than other IFIs YesUnder discussion FSO: No IADB: Yes; makes FSO investment decisions Yes (since 2004) Status Yes 85% principal ( interest at other conditions ) subject to liquidity policy Yes Yes but excl. receivables against IOCs 85% principal ( interest at other conditions ) subject to liquidity policy Yes Unlimited subject to liquidity policy Yes 95% principal ( interest at other conditions ) subject to liquidity policy Yes Yes but excl. receivables against IOCs ACA (3 yrs principal and interest) Yes n.a. a. Contributions b. Loan reflows c. Invest.income d. Transfers from BankAfDFAsDFFSOIDAIFAD ALM Framework Included in Committable Resources 8

the rural rural poor poor toovercome poverty enabling Scenario for 7 th Replenishment Comparing the proposed ALM definition versus current definition of committable resources: Comparing the proposed ALM definition versus current definition of committable resources:  Achievable annual loan and grant approvals  Liquidity  Balance Sheet - composition of assets Assuming: - 10% annual growth in loan and grant approvals in 7 th Repl. - 7 th Repl. of USD 800 million - ALM definition is limited to 5 yrs of net future loan reflows 9

the rural rural poor poor toovercome poverty enabling  Achievable annual loan and grant approvals: Current definition: 10% annual growth in approvals in 7 th Repl. Approvals remaining during 8 th Repl. at the end level of 7 th Repl. with an 8 th Repl. of USD 1.1 billion (or requiring an 8 th Repl. of USD 1.65 billion to maintain 10% growth) ALM definition: 10% annual growth sustained in 7 th and 8 th Repl. with an 8 th Repl. of USD 1.1 billion Scenario for 7 th Replenishment (cont’d) Achievable Annual Loan and Grant Approvals USD million 7th Repl.8th Repl. ALM definitionCurrent definition Current Annual Approvals

the rural rural poor poor toovercome poverty enabling  Liquidity – based on achievable loan and grant approvals: Current definition: ample liquidity ALM definition: lower but sustainable liquidity Scenario for 7 th Replenishment (cont’d) ALM definitionCurrent definition Liquidity (Total investment portfolio) 7th Repl. Current Liquidity Level USD million 8th Repl

the rural rural poor poor toovercome poverty enabling Scenario for 7 th Replenishment (cont’d)  Result of ALM definition of committable resources: ability to approve more loans and grants reallocation from investment portfolio to loans outstanding End of 7th Repl.End of 8th Repl. Loans outstandingContributions incl. other receivablesInvestment portfolio Current Definition ALM Definition Current Definition 65% 30% 66% ↑ 67% 28% ↓ 27% Balance Sheet - Composition of Assets USD million Current Definition ALM Definition (Based on achievable loan and grant approvals) 12

the rural rural poor poor toovercome poverty enabling Asset Liability Management (ALM) Conclusions: Conclusions: To support increased demand for rural poverty reduction, IFAD could increase its loans and grants approvals by: To support increased demand for rural poverty reduction, IFAD could increase its loans and grants approvals by: Revisiting its definition of committable resources Revisiting its definition of committable resources Proceeding cautiously and gradually towards a more Proceeding cautiously and gradually towards a more dynamic financial resource management (like other IFIs) dynamic financial resource management (like other IFIs) within a sound ALM framework within a sound ALM framework IFAD Inception in 1977IFAD 28 Years in 2005 Approvals Current approach Dynamic approach ? 13

the rural rural poor poor toovercome poverty enabling Asset Liability Management Framework 7 th Replenishment Consultations – 2 nd Session Rome, April 2005