IDA-only Debt Reduction Facility

Project Finance and Guarantees Group

The World Bank

Objective of the Presentation

Overview of the IDA-only Debt Reduction Facility (“Facility”)

Overview of the requirements and procedures involved.

How can the Facility assist a country?

Content of this Presentation

Definition and purpose. What countries qualify for support. What debt is eligible. Characteristics of an operation. Overview of completed operations. Financing. Procedures.

Definition and Purpose

Established in 1989, as a mechanism to assist IDA-only countries in reducing their external commercial debt.

Funds provided as grants:– Technical Assistance for hiring advisors and – Finance the operation.

Facility is funded with transfers from IBRD’s net income. (US$350 million)

Countries eligible.

Highly indebted IDA-only countries A medium term adjustment program. A comprehensive strategy for debt

management:– addresses the commercial debt comprehensively– provides substantial relief from official bilateral

creditors.– enhances country’s growth and development.

What debt is eligible.

all publicly guaranteed uninsured medium and long-term commercial debt in arrears

all publicly guaranteed uninsured short-term debt (trade financing, suppliers credit and overdrafts)

Debt that is not eligible

Paris Club debt. Bilateral debt (Government to Government) Third party Guarantee.

Characteristics of an operation.

Case by Case basis. Deep discount. Preferred option is a buy-back. Interest and penalties extinguished.

(buy-back of principal only.) Comprehensive operation Donor co-financing expected.

Financing

IDA provides grants for Technical Assistance and/or to finance the operation.

Grants from bilateral sources are expected. US$ 207 million obtained to date. If necessary complementary resources can

be obtained from IDA credits.

First Steps

Formal Request from the Government so that IDA can provided resources to hire Financial and Legal advisors.

Review the data base. Set up a task team in the country consisting

of Central Bank, MOF or others as the case may be.

Operations

Altogether 22 operations have been successfully completed.

A total of US$ 4.5 billion of principal in commercial debt have been extinguished.

More than US$ 3.5 billion of interest arrears and penalties have been extinguished.

General Characteristics

The price has fluctuated from 8 cents a dollar of principal to 26 cents a dollar of principal buy-back.

Acceptance level from 64% to 100%. Grants provided from US$1.3 million to US$97.4

million. Structure has included straight buy-back,

discounted bonds, debt for development and debt-equity swaps.

Some Operations

Ethiopia– Buy-back that included

dollar denominated Russian debt.

Mauritania– Buy-back that included

debts from parastatal to parastatal companies (commercial nature)

Nicaragua– Buy-back of US$1.3

billion of commercial bank debt.

Sao Tome & Principe– Buy-back which

required only US$1 million of financing.

Some Operations

Senegal– included a discount

bond option guarantee with zero-coupon bonds that could be used in the local economy (to pay taxes, privatization, etc..)

Zambia– more than 5,000

creditors and pipeline debt.

– included various options. (debt for development, buy-back, discounted bonds)

General Procedure Letter from the Government Requesting access to Facility

resources. Define the amount of the Grant for TA and modalities. MOP to request the Grant from the Board. Grant agreement with the Government. Government hires advisors through competitive bidding.

(we provide draft TOR, contract and long list.)

General Procedure (cont) Contracts with legal and financial advisors. (signed

between the Government and advisors) Debt reconciliation process to determine the eligible

amount. (issues of eligibility are addressed) Informal contacts with creditors to determine market

expectations. (informal reports on specific finding) Formal Report from the advisors is discussed (should

included strategy, price, threshold and issues pending) Strategy approved, financing determined and co-financing

from donors identify and requested.

General Procedure (cont) MOP to request Grant from the Board. (includes all

eligible debt as well as commitments from donors) Grant agreement with the Government. Operation is launched in the market. (offering

memorandum is distributed to creditors) Operation is closed (paid at the closing date specified in

the offering memorandum) Auditors are hired and auditing report done. Closing report to the Board.