Annual Report 2021 The International Bank for Reconstruction and Development (IBRD) and The International Development Association (IDA) Management's Discussion & Analysis and Financial Statements (Fiscal 2021) June 30, 2021 International Bank for Reconstruction and Development Management’s Discussion & Analysis and Financial Statements June 30, 2021 Management’s Discussion and Analysis Contents Section I: Executive Summary Summary Financial Results 4 Section II: Overview Introduction 6 Presentation 6 Financial Business Model 6 Basis of Reporting 8 Section III: Financial Results Summary of Financial Results 10 Total Assets 11 Net Income 11 Net Income Allocation 17 Section IV: Lending Activities Net Lending Commitments and Gross Disbursements 20 Lending Categories 21 Currently Available Lending Products 22 Discontinued Lending Products 24 Waivers 24 Section V: Other Development Activities Guarantees 26 Grants 27 Externally-Funded Activities 28 Section VI: Investment Activities Liquid Asset Portfolio 31 Other Investments 32 Section VII: Borrowing Activities Medium- and Long-Term Borrowings 35 Section VIII: Capital Activities Capital Structure 36 Usable Equity 37 Section IX: Risk Management Risk Governance 39 Risk Oversight and Coverage 39 Management of IBRD’s Risks 42 Coronavirus Disease 2019 (COVID-19) Outbreak 42 Capital Adequacy 43 Credit Risk 44 Market Risk 51 Operational Risk 56 Section X: Contractual Obligations Contractual Obligations 58 Section XI: Pension and Other Post-Retirement Benefits Governance 59 Funding and Investment Policies 59 Environmental, Social and Governance (ESG) Policies 60 Projected Benefit Obligation 60 Section XII: Critical Accounting Policies and the Use of Fair Value of Financial Instruments 61 Estimates Provision for Losses on Loans and Other Exposures 62 Pension and Other Post-Retirement Benefits 62 Section XIII: Governance and Controls Business Conduct 63 General Governance 63 Executive Directors 63 Audit Committee 64 Auditor Independence 65 External Auditors 65 Senior Management Changes 65 Internal Control 65 Appendix Glossary of Terms 66 Abbreviations and Acronyms 67 Eligible Borrowing Member Countries by Region 68 List of Tables, Figures and Boxes 68 IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2021 1 Management’s Discussion and Analysis This Management’s Discussion and Analysis (MD&A) discusses the financial results of the International Bank for Reconstruction and Development (IBRD) for the fiscal year ended June 30, 2021 (FY21). IBRD undertakes no obligation to update any forward-looking statements. Certain reclassifications of prior years’ information have been made to conform with the current year’s presentation. For discussion of IBRD’s financial results for the year ended June 30, 2020 as compared to the year ended June 30, 2019, see Section III – Financial Results in IBRD’s MD&A and Financial Statements for the fiscal year ended June 30, 2020. For information relating to IBRD’s development operations’ results and corporate performance, refer to the World Bank Corporate Scorecard and Sustainability Review. Box 1: Selected Financial Data In millions of U.S. dollars, except ratios which are in percentages As of and for the fiscal years ended June 30 2021 2020 2019 2018 2017 Lending Highlights (Section IV) Net commitments a $ 30,523 $ 27,976 $ 23,191 $ 23,002 $ 22,611 Gross disbursements b 23,691 20,238 20,182 17,389 17,861 Net disbursements b 13,590 10,622 10,091 5,638 8,731 Income Statement (Section III) Board of Governors-approved and other transfers $ (411) $ (340) $ (338) $ (178) $ (497) Net income (loss) 2,039 (42) 505 698 (237) Balance Sheet Total assets $ 317,301 $ 296,804 $ 283,031 $ 263,800 $ 258,648 Net investment portfolio (Section VI) 85,831 82,485 81,127 73,492 71,667 Net loans outstanding (Section IV) 218,799 202,158 192,752 183,588 177,422 Borrowing portfolio c (Section VII) 253,656 237,231 228,763 213,652 207,144 Total equity 48,078 40,387 42,115 41,844 39,798 Non-GAAP Measures: Allocable Income (Section III) Allocable income $ 1,248 $ 1,381 $ 1,190 $ 1,161 $ 795 Allocated as follows: General Reserve d 874 950 831 913 672 International Development Association 274 - 259 248 123 Surplus 100 431 e 100 - - Usable Equity f g (Section VIII) $ 49,997 $ 47,138 $ 45,360 $ 43,518 $ 41,720 Equity-to-loans ratio h (See Section IX) 22.6% 22.8% 22.8% 22.9% 22.8% a. Amounts include guarantee commitments and guarantee facilities that have been approved by the Executive Directors (referred to as “the Board” in this document), and are net of full terminations and cancellations relating to commitments approved in the same fiscal year. b. Amounts include transactions with the International Finance Corporation (IFC) and loan origination fees. c. Includes associated derivatives. d. The June 30, 2021 amount represents the transfer to the General Reserve from FY21 net income, which was approved by the Board on August [5], 2021. e. On January 25, 2021, the Board of Governors approved a transfer of $331 million to IDA from Surplus, which was made on February 1, 2021. f. Excludes amounts associated with unrealized mark-to-market gains/losses on non-trading portfolios, net and related cumulative translation adjustments. g. As defined in Table 28: Usable Equity. Usable Equity includes the transfer to the General Reserve from FY21 net income, which was approved by the Board on August [5], 2021. h. As defined in Table 29: Equity-to-Loans Ratio. 2 IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2021 Management’s Discussion and Analysis Section I: Executive Summary Section I: Executive Summary With its many years of experience and its depth of knowledge in the international development arena, IBRD plays a key role in achieving the World Bank Group’s (WBG 1 ) goal of helping countries achieve better development outcomes. IBRD contributes to both the WBG’s twin goals of ending extreme poverty and promoting shared prosperity, and to the Forward Look2, by providing countries with loans, advisory services and analytical support. IBRD and its affiliated organizations seek to help countries achieve improvements in growth, job creation, poverty reduction, governance, the environment, climate adaptation and resilience, human capital, infrastructure and debt transparency. To meet its development goals, the WBG has been increasing its focus on country programs in order to improve growth and development outcomes. The Bank’s operational realignment, which came into effect on July 1, 2020, strengthens the country-driven delivery model, while strengthening thought leadership on development issues of critical importance to sustainable growth and poverty alleviation. Support continues to be prioritized for countries at lower levels of income, and fragile and conflict-affected states. The new model also strengthens the focus on Africa with two Vice Presidencies, one focused on Western and Central Africa and the other on Eastern and Southern Africa. In response to the global outbreak of the coronavirus disease (COVID-19) and to support global public goods, IBRD has been working in solidarity with partners at global and country levels to support its borrowing countries. A significant portion of the FY21 commitments supported COVID-19 related efforts. IBRD’s operational response includes three stages: a) Relief stage that involves emergency response to the health threat, b) Restructuring stage that focuses on strengthening health systems, restoring human capital, and restructuring of firms and sectors, and c) Resilient recovery stage that entails new opportunities to build a more sustainable, inclusive and resilient future. Each stage is structured through four thematic crisis response pillars: i) Saving lives, ii) Protecting the poor and vulnerable, iii) Ensuring sustainable business growth and job creation, and iv) Strengthening policies, institutions, and investments for rebuilding better. 1 The other WBG institutions are the International Development Association (IDA), the International Finance Corporation (IFC), the Multilateral Investment Guarantee Agency (MIGA), and the International Centre for Settlement of Investment Disputes (ICSID). 2 The Forward Look: A Vision for the WBG in 2030, describes how the WBG will deliver on its twin goals and its three priorities. The Forward Look rests on four pillars: serving all clients; mobilizing resources for development; leading on global issues; and improving the business model. IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2021 3 Management’s Discussion and Analysis Section I: Executive Summary Summary Financial Results The financial performance of IBRD reflects the impact of the measures put in place in previous years to increase its financial capacity and ensure its long-term financial sustainability. In FY21, IBRD had allocable income of $1,248 million. On August [5], 2021, the Executive Directors (the Board), approved the retention of $874 million in the General Reserve out of the allocable income for the fiscal year ended June 30, 2021. Net Income and Allocable Income IBRD had net income of $2,039 million for the fiscal year ended June 30, 2021, compared with a net loss of $42 million for the fiscal year ended June 30, 2020. The increase in FY21 was largely due to $1,218 million of net unrealized mark-to-market gains on IBRD’s non-trading portfolios in FY21, primarily from derivatives in the loan portfolio. In FY20, IBRD recorded unrealized mark-to-market losses of $1,137 million on IBRD’s non-trading portfolios. Given IBRD’s intention to maintain its non-trading portfolio positions, unrealized mark-to-market gains and losses are not included in IBRD’s allocable income. Allocable income is the measure IBRD uses for making net income allocation decisions. IBRD’s FY21 allocable income was $133 million lower than the $1,381 million for the fiscal year ended June 30, 2020. The decrease in allocable income was primarily driven by a higher loan loss provisioning charge of $147 million in FY21, compared with a loan loss provisioning charge of $23 million in FY20. In millions of U.S dollars Allocable income Net Income/Loss Unrealized gains/losses 2,500 1,500 500 -500 -1,500 -2,500 FY17 FY18 FY19 FY20 FY21 Lending Operations IBRD’s lending operations during the fiscal year ended June 30, 2021 provided $30.5 billion of net commitments and $13.6 billion of net loan disbursements. Net loan disbursements were the key driver of the $16.6 billion increase in net loans outstanding, from $202.2 billion at the end of the fiscal year ended June 30, 2020, to $218.8 billion at the end of the fiscal year ended June 30, 2021. In billions of U.S dollars Net Commitments Disbursements Net Loans outstanding 35 35 250 30 30 200 25 25 Gross 20 20 150 15 15 100 10 10 Net 50 5 5 0 0 0 Jun 17 Jun 18 Jun 19 Jun 20 Jun 21 Jun 17 Jun 18 Jun 19 Jun 20 Jun 21 Jun 17 Jun 18 Jun 19 Jun 20 Jun 21 Net commitments were $2.5 billion higher compared with the same period in FY20 (Table 9), reflecting the strong support IBRD has provided during the COVID pandemic, including $1.5 billion of newly approved financing for vaccines as of June 30, 2021, benefiting 10 borrowing countries. The regions with the largest share of commitments during FY21 were Latin America and the Caribbean with 31% and East Asia and Pacific with 22%. 4 IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2021 Management’s Discussion and Analysis Section I: Executive Summary Net Investment Portfolio IBRD’s investment portfolio increased by $3.3 billion, from $82.5 billion In billions of U.S dollars as of June 30, 2020, to $85.8 billion as of June 30, 2021. The investments Net Investment Portfolio 300 remain concentrated in the upper end of the credit spectrum, with 72% 250 rated AA or above, reflecting IBRD’s objective of principal protection 200 and its preference for high-quality investments. 150 100 50 0 Jun 17 Jun 18 Jun 19 Jun 20 Jun 21 Borrowing Portfolio IBRD raised net medium and long-term debt of $15.8 billion during FY21 In billions of U.S dollars (with new issuances of $67.5 billion), resulting in $16.5 billion increase in Borrowing Portfolio the borrowings portfolio during the year, from $237.2 billion as of June 30, 300 2020, to $253.7 billion as of June 30, 2021. The funds raised financed 250 development lending operations and satisfied liquidity requirements. The 200 debt issuances were highly diversified in terms of investor types and location, 150 with an average maturity of 8.1 years. 100 50 0 Jun 17 Jun 18 Jun 19 Jun 20 Jun 21 Usable Equity and Equity-to-Loans Ratio IBRD’s usable equity increased by $2.9 billion, from $47.1 billion as of June 30, 2020 to $50.0 billion as of June 30, 2021. In FY21, IBRD received $1.2 Equity to Loans ratio 30 billion of paid-in capital under the General and Selective Capital Increases (GCI and SCI), bringing the cumulative amounts received to $2.8 billion, 20 37% of the total amount expected. 10 The Equity-to-Loans ratio was 22.6% as of June 30, 2021, marginally lower compared with 22.8% as of June 30, 2020, as the increase in the loan and 0 other exposures outpaced the increase in usable equity. Jun 17 Jun 18 Jun 19 Jun 20 Jun 21 IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2021 5 Management’s Discussion and Analysis Section II: Overview Section II: Overview Introduction IBRD, an international organization owned by its 189-member countries, is one of the five institutions of the WBG. Each institution is legally and financially independent, with separate assets and liabilities. IBRD is not liable for the obligations of the other institutions. IBRD is one of the largest Multilateral Development Banks (MDB) in the world and combines knowledge services and financing with global reach. IBRD’s value derives from its ability to help eligible borrowing members address their development challenges and meet their rising demand for innovative products. IBRD provides loans, guarantees, and other financial products for development-focused projects and programs to creditworthy middle-income and lower-income countries to support sustainable development. By operating across a full range of country clients, IBRD maintains a depth of development knowledge, uses its convening power to promote development and advance the global public goods agenda, and coordinates responses to regional and global challenges. Member countries use IBRD’s technical advice and analysis and convening power to develop or implement better policies, programs, and reforms that help sustain development over the long term. The products delivered range from development data, to reports in key social economic and social issues at the local, country, regional and global levels. The products also include knowledge-sharing workshops focused on local issues, to flagship events and fora to address the most pressing global development challenges. Presentation This document provides management’s discussion and analysis of the financial condition and results of operations for IBRD for the fiscal year ended June 30, 2021. At the end of this document there is a Glossary of Terms and a list of Abbreviations and Acronyms. Certain reclassifications of prior years’ information have been made to conform to the current year’s presentation. For further details, see Note A: Summary of Significant Accounting and Related Policies in the Notes to the Financial Statements for the year-ended June 30, 2021. Financial Business Model IBRD’s objective is not to maximize profits, but to earn adequate income to ensure that it has the long-term financial capacity necessary to support its development activities. IBRD seeks to generate sufficient revenue to finance its operations as well as to be able to set aside funds in reserves to strengthen its financial position. It also seeks to provide support to IDA and trust funds via income transfers for other developmental purposes. IBRD’s financial strength rests on the support it receives from its shareholders, and on its array of financial policies and practices. Shareholder support for IBRD is reflected in the capital backing it continues to receive from its members and in the record of its borrowing member countries in meeting their debt service obligations to IBRD. Sound financial and risk management policies and practices have enabled IBRD to maintain adequate capital, diversify its funding sources, hold a portfolio of liquid investments to meet its financial commitments, and limit its risks, including credit and market risks. IBRD offers its borrowers, in middle income and creditworthy lower-income countries, long-term loans with maturities of up to 35 years. Borrowers may customize their repayment terms to meet their debt management or project needs, and loans are offered on fixed and variable terms in multiple currencies. Effective April 1, 2021, IBRD’s offering of loans on fixed spread terms has been suspended (see section IX: Risk Management). Borrowers have generally preferred loans denominated in U.S dollars and euros. IBRD also supports its borrowers by providing access to risk management tools such as derivative instruments, including currency and interest rate swaps and interest rate caps and collars. To meet its development goals, it is important for IBRD to intermediate funds for lending from the international capital markets. IBRD’s loans are financed through its equity, and from borrowings raised in the capital markets. IBRD is rated triple-A by the major rating agencies and its bonds are viewed as high-quality securities by investors. IBRD’s funding strategy is aimed at achieving the best long-term value on a sustainable basis for its borrowing members. This strategy has enabled IBRD to borrow at favorable market terms and pass the savings on to its borrowing members. IBRD’s annual funding volumes vary from year to year, and funds raised are used to finance IBRD’s development 6 IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2021 Management’s Discussion and Analysis Section II: Overview projects and programs in member countries. Funds not deployed for lending are maintained in IBRD’s investment portfolio to supply liquidity for its operations. Figure 1 below illustrates IBRD’s financial business model. Figure 1: IBRD’s Financial Business Model IBRD uses derivatives to manage its exposure to various market risks from the above activities. These are used to align the interest and currency composition of its assets (loan and investment trading portfolios) with that of its liabilities (borrowing portfolio), and to stabilize earnings on the portion of the loan portfolio funded by equity. See Section IX: Risk Management for additional details on how IBRD uses derivatives. Management believes that these risk management strategies, taken together, effectively manage market risk in IBRD’s operations from an economic perspective. However, these strategies entail the use of derivatives, which introduce volatility in net income through unrealized mark-to-market gains and losses (particularly given the long-term nature of some of IBRD’s assets and liabilities). Accordingly, management makes decisions on income allocation without reference to unrealized mark-to-market gains and losses on risk management instruments in the non-trading portfolios – see Basis of Reporting – Allocable Income. Financial Performance IBRD’s primary sources of revenue are from loans and investments, both net of funding costs (see Figure 2). These revenues cover administrative expenses, provisions for losses on loans and other exposures 3 (LLP), as well as transfers to Reserves, Surplus, and for other development purposes, including transfers to IDA. In addition, other development activities generate noninterest revenue that is classified as Revenue from externally funded activities. These external funds include trust funds, reimbursable funds and revenues from fee-based services to member countries, which relate primarily to Reimbursable Advisory Services (RAS), Externally Financed Outputs (EFO), and the Reserves Advisory Management Program (RAMP). Noninterest revenue from externally funded activities provides additional capacity to support the development needs of client countries. 3 Other exposures include deferred drawdown options (DDO), irrevocable commitments, exposures to member countries’ derivatives and guarantees. IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2021 7 Management’s Discussion and Analysis Section II: Overview Figure 2: Sources and Uses of Revenue Sources Uses Simplified Revenue Funding Net Interest Balance Sheet Revenue Liquid Return on Cost of Investment Inv. Investments debt Revenue, net Admin D Expenses e b t LLP Cost of Loan Interest L Loan revenue debt Revenue, net o a Reserves n s Allocable Income IDA, Other Equity transfers & Surplus The financial results for FY21 continue to reflect the impact of the measures implemented in prior years to enhance IBRD’s financial sustainability. In 2018, the Board of Governors (the Governors) endorsed a capital package consisting of a series of policy and financial measures designed to enhance IBRD’s equity, lending capacity, and its ability to fund priorities that meet shareholder goals while also ensuring its long-term financial sustainability. The package included the following: 1) a GCI and SCI that will provide up to $7.5 billion in additional paid-in capital, which was approved by the Governors on October 1, 2018 2) new loan pricing measures, which became effective from July 1, 2018 3) an increase in the Single Borrower Limit (SBL) with differentiation based on per capita income 4) continued efficiency measures and administrative simplification, and 5) a financial sustainability framework, under which management provides an update of the sustainable annual lending level and the Board approves a crisis buffer, which enables IBRD to respond to crises. Basis of Reporting Audited Financial Statements IBRD’s financial statements conform with accounting principles generally accepted in the United States of America (U.S. GAAP). All financial instruments in the investment and borrowing portfolios and all other derivatives are reported at fair value, with changes in fair value reported in the Statement of Income, except for changes in IBRD’s own credit, which are reflected in Other Comprehensive Income. IBRD’s loans are reported at amortized cost, except for loans with embedded derivatives, if any, which are reported at fair value. Management uses net income as the basis for deriving allocable income, as discussed below. Allocable Income IBRD’s Articles of Agreement (the Articles) require that the Governors determine the allocation of income at the end of every fiscal year. Allocable income, which is a non-GAAP financial measure, is an internal management measure that reflects income available for allocation. IBRD defines allocable income as net income after certain adjustments, that are approved by the Board at the end of every fiscal year. These adjustments primarily relate to unrealized mark- 8 IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2021 Management’s Discussion and Analysis Section II: Overview to-market gains and losses associated with its non-trading portfolios, as well as the expenses for Board of Governors- approved and other transfers, which primarily relate to the allocation of the prior year’s net income. See Financial Results Section (Section III) and Table 8 for details of the adjustments to reported net income required to calculate allocable income. The volatility in IBRD’s reported net income is primarily driven by the unrealized mark-to-market gains and losses on the derivative instruments in IBRD’s non-trading portfolios: loans, borrowings, and other asset/liability management (ALM). IBRD’s risk management strategy entails the use of derivatives to manage market risk. These derivatives are primarily used to align the interest rate and currency bases of its assets and liabilities. IBRD has elected not to designate any hedging relationships for accounting purposes. Rather, all derivative instruments are reported at fair value on the Balance Sheet, with changes in fair values accounted for through the Statement of Income. In line with its financial risk management policies, for the non-trading portfolios, unrealized gains and losses from instruments carried at fair value (borrowings and associated derivatives, and derivatives in the loan and other ALM portfolios) are excluded from allocable income. For the trading portfolio (investment portfolio), allocable income includes both realized and unrealized mark-to- market gains and losses. IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2021 9 Management’s Discussion and Analysis Section III: Financial Results Section III: Financial Results The following section is a discussion of IBRD’s Results of Operations on a GAAP and Allocable Income basis, for the fiscal year-ended June 30, 2021 compared with the fiscal year-ended June 30, 2020, as well as changes in its financial position between June 30, 2021 and June 30, 2020. Summary of Financial Results Table 1: Condensed Statement of Income In millions of U.S. dollars Impact on income For the fiscal year ended June 30, 2021 2020 (Decrease) Increase Interest Revenue, net of Funding Costs Loan interest revenue, net $ 1,754 $ 2,149 (395) Other ALM derivatives, net 604 161 443 Investment revenue, net 86 104 (18) Net Interest Revenue $ 2,444 $ 2,414 30 Provision for losses on loans and other exposures a (147) (23) (124) Net non-interest expenses (Table 5) (1,395) (1,239) (156) Net other revenue (Table 4) 295 226 69 Board of Governors-approved and other transfers (411) (340) (71) Non-functional currency translation adjustments gains, net b 35 57 (22) Unrealized mark-to-market gains (losses) on non- trading 1,218 (1,137) 2,355 portfolios, net c Net Income (Loss) $ 2,039 $ (42) 2,081 Adjustments to Reconcile Net Income (Loss) to Allocable Income - Pension d and other adjustments 51 3 48 Board of Governors-approved and other transfers 411 340 71 Non-functional currency translation adjustments gains, net b (35) (57) 22 Unrealized mark-to-market (gains) losses on non- trading (1,218) 1,137 (2,355) portfolios, net c Allocable Income $ 1,248 $ 1,381 (133) a. Includes a reduction (expense) in the recoverable asset of less than $1 million for FY21 and $5 million for FY20. These amounts relate to the change in the value of the risk coverage received (recoverable assets) associated with the MDB EEA transactions and are included in other non-interest revenue on IBRD’s Statement of Income. b. Translation adjustments relating to assets and liabilities denominated in non-functional currencies. c. Adjusted to exclude amounts reclassified to realized gains (losses). d. Adjustment to pension accounting expense to arrive at pension plan contributions. Pension plan contributions were $245 million for FY21 and $229 million for FY20. IBRD’s principal assets are its loans to member countries. These are financed by IBRD’s equity and borrowings from the capital markets. Table 2: Condensed Balance Sheet In millions of U.S. dollars As of June 30, 2021 2020 Variance Investments and due from banks $ 90,251 $ 86,031 Net loans outstanding a 218,799 202,158 Derivative Assets, net 3,355 3,744 Other assets 4,896 4,871 Total Assets $ 317,301 $ 296,804 Borrowings 260,076 243,240 Derivative Liabilities, net 1,222 1,473 Other liabilities 7,925 11,704 Equity 48,078 40,387 Total Liabilities and Equity $ 317,301 $ 296,804 a. The fair value of IBRD’s loans was $223,687 million as of June 30, 2021 ($209,613 million – June 30, 2020). 10 IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2021 Management’s Discussion and Analysis Section III: Financial Results Total Assets As of June 30, 2021, total assets grew by 7% compared with June 30, 2020. The growth was primarily due to the increase in net loans outstanding resulting from positive net disbursements during the fiscal year. The following is a discussion of the key drivers of IBRD’s financial performance, including a reconciliation between IBRD’s reported net income and allocable income. Net Income IBRD’s net income was $2,039 million in FY21, compared with a net loss of $42 million in FY20. The increase in net income in FY21 primarily reflects unrealized mark-to market gains on the loan-related derivatives, mainly driven by the increase in interest rates in FY21 (see Table 1 and Notes to Financial Statements, Note L: Fair Value Disclosures, Table L11). Results from Lending activities Loan Interest Revenue, net Loans are funded by equity and borrowings raised in the capital markets. Under IBRD’s pricing policy, the lending rates for all of IBRD’s loans are based on the underlying cost of the borrowings funding these loans. After the effect of related swaps (see Figure 23 and Figure 24), the loan and borrowing portfolios are based on variable interest rates, and the portion of the loan portfolio funded by equity is therefore sensitive to changes in interest rates. IBRD’s FY21 Loan interest revenue, net was $1,754 million, a decrease of $395 million compared with $2,149 million in FY20. The decrease was mainly driven by the effect of the decreasing average interest rate environment on the portion of the loan portfolio which is sensitive to interest rate movements between the two years. This was partially offset by the higher lending volume during the period, as well as the impact of the pricing measures previously adopted. Other ALM derivatives moderate the impact of interest rate changes on the portion of the loan portfolio, which is sensitive to interest rate movements, stabilizing the net interest revenue earned from these loans (see Figure 5). As illustrated in Table 1, the combined effect of the increase in interest revenue from Other ALM derivatives, net of $443 million and the decrease in Loan interest revenue, net of $395 million from FY20 to FY21, was an overall increase of $48 million. Loan Portfolio As of June 30, 2021, IBRD’s net loans outstanding totaled $218.8 billion, $16.6 billion or 8% higher than June 30, 2020 (see Figure 3). The increase was mainly attributable to $13.6 billion of net loan disbursements in FY21, as well as currency translation gains of $2.7 billion, primarily due to the 6.1% appreciation of the euro against the U.S. dollar during the year. Gross disbursements were $23.7 billion, 17% higher compared to FY20, primarily driven by a higher level of disbursements for Development Policy Financing (DPF) operations (see Section IV). IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2021 11 Management’s Discussion and Analysis Section III: Financial Results Table 3: Net Loans Outstanding activity Figure 3: Net Loans Outstanding In millions of U.S. dollars FY19 FY20 FY21 250 Net Loans outstanding as of June 30, 2020 $ 202,158 219 202 Activity during the year: 193 (In Billions of U.S. dollars) 200 Gross loan disbursements 23,691 Loan repayments (10,101) 150 Change in accumulated provision for loan losses a 342 100 Change in deferred loan income (15) Translation adjustments 2,724 50 Total activity $ 16,641 Net Loans outstanding as of June 30, 2021 $ 218,799 0 a. Includes a decrease of $465 million in the accumulated provision for loan FY19 FY20 FY21 losses as of July 1, 2020 due to the adoption of ASU 2016-13 (CECL). See Notes to Financial Statements, Note D: Loans and Other Exposures. Figure 4: Loan Interest Revenue, net Figure 5: Derived Spread In millions of U.S. dollars Basis Points Loan Interest Revenue, net 350 Loan - Weighted Average Return Loan interest revenue, net and Other ALM derivatives, before funding costs (after swaps) net combined 300 2,500 250 2,000 200 1,500 150 Weighted Average 1,000 Funding Cost 100 (after swaps) 500 50 Derived Spread 0 0 FY17 FY18 FY19 FY20 FY21 Jun-17 Jun-18 Jun-19 Jun-20 Jun-21 Results from Investing activities Net Investment Revenue During FY21, interest revenue from investments, net of funding costs, was $86 million, compared with $104 million during FY20. The lower net investment revenue was mainly due to the lower interest rate environment during the year. Investment Portfolio IBRD’s investment portfolio consists mainly of the liquid asset portfolio. As of June 30, 2021, the net investment portfolio totaled $85.8 billion, with $82.8 billion representing the liquid asset portfolio. This compares with $82.5 billion a year earlier, of which $79.9 billion represented the liquid asset portfolio (see Note C: Investments in the Notes to the Financial Statements). The increase in the liquid asset portfolio is primarily due to proceeds from new debt issuances, partially offset by net loan disbursements during FY21 (see Section IX). 12 IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2021 Management’s Discussion and Analysis Section III: Financial Results Figure 6: Net Investment Portfolio In billions of U.S. dollars 100 Liquid asset portfolio Other investments portfolio 2 2 3 80 60 79 80 83 40 20 0 FY19 FY20 FY21 Results from Borrowing activities Borrowing Portfolio As of June 30, 2021, the borrowing portfolio (including associated derivatives) totaled $253.7 billion, $16.5 billion higher than June 30, 2020 (see Note E: Borrowings in the Notes to the Financial Statements). The increase was primarily due to net new medium and long-term debt issuances during the year. In FY21, to fund its operations, IBRD raised medium-and long-term debt of $67.5 billion, $7.5 billion less than FY20 (see Table 24). The decrease in medium-and long-term debt issuances in FY21 is primarily due to lower debt servicing and refinancing requirements. Figure 7: Borrowing Portfolio (original maturities) In billions of U.S. dollars Medium-and long-term Borrowings Short-term Borrowings 300 10 250 10 11 200 150 226 244 100 219 50 0 FY19 FY20 FY21 Net Other Revenue Net other revenue includes certain non-interest sources of revenue. Table 4 provides details on the composition of net other revenue; The increase of $69 million was mainly due to the higher asset return from the Post-Employment Benefit Plan (PEBP) and Post-Retirement Contribution Reserve Fund (PCRF), partially offset by the lower impact from the transactions associated with the Pandemic Emergency Financing Facility (PEF) in FY21, as the trades matured in July 2021. IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2021 13 Management’s Discussion and Analysis Section III: Financial Results Table 4: Net Other Revenue In millions of U.S. dollars For the fiscal year ended June 30, 2021 2020 Variance Loan commitment fees $ 115 $ 115 $ - Guarantee fees 14 15 (1) Net Earnings from Post-Employment Benefit Plan (PEBP) and Post-Retirement 168 17 151 Contribution Reserve Fund (PCRF) PEF and PAF a (6) 53 (59) Others 4 26 (22) Net other revenue (Table 1) $ 295 $ 226 $ 69 a. Amounts are fully offset by fair value changes in trades (facing counterparties) related to PEF and PAF, which are included in Unrealized mark-to market gains/(losses) on non-trading portfolios, net (Table 1). Expenses Net Non-Interest Expenses As shown in Table 5, IBRD’s net non-interest expenses are primarily comprised of administrative expenses, net of revenue from externally funded activities. IBRD/IDA's administrative budget is a single resource envelope that funds the combined work programs of IBRD and IDA. The allocation of administrative expenses and revenue between IBRD and IDA is based on an agreed cost and revenue sharing methodology, approved by their Boards, which is primarily driven by the relative level of lending, knowledge services, and other services between these two institutions. The administrative expenses shown in Table 5 include costs related to IBRD executed trust funds and other externally funded activities. Figure 8: Net Non-Interest Expenses In millions of U.S. dollars 1,500 1,400 1,300 1,200 1,100 1,000 900 800 FY17 FY18 FY19 FY20 FY21 The increase in net non-interest expenses in FY21 relative to FY20 was primarily due to: a) the increase in pension costs driven by a decrease in the discount rate in FY20, which resulted in higher amortization of unrecognized actuarial losses in FY21, and b) an increase in the share of costs allocated to IBRD. The increase in administrative expenses was partially offset by a significant reduction in travel costs due to COVID-19. IBRD monitors its net administrative expenses as a percentage of its loan spread revenue (Box 2) and certain fee revenue, using an efficiency measure referred to as the Budget Anchor. In FY21, IBRD’s Budget Anchor was 66%, a decline of 8 percentage points compared with 74% in FY20. The decline reflects the increase in IBRD’s loan spread revenue during the year (see Figure 9 and Table 6 for details of the Budget Anchor components). 14 IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2021 Management’s Discussion and Analysis Section III: Financial Results Table 5: Net Non-Interest Expenses In millions of U.S. dollars For the fiscal year ended June 30, 2021 2020 Variance Administrative expenses Staff costs $ 1,006 $ 957 $ 49 Travel 13 112 (99) Consultant fees and contractual services 473 443 31 Pension and other post-retirement benefits a 452 308 142 Communications and Technology 63 55 8 Premises and equipment 123 130 (7) Other expenses 23 18 6 Total administrative expenses b $ 2,153 $ 2,023 $ 130 Grant Making Facilities (See Section V) 18 18 - Revenue from externally funded activities (See Section V) Reimbursable revenue – IBRD executed trust funds (470) (470) - Reimbursable advisory services (53) (67) 14 Revenue - Trust fund administration (44) (42) (2) Restricted revenue (primarily externally financed outputs) (18) (29) 11 Revenue - Asset management services (18) (17) (1) Other revenue (173) (177) 4 Total Revenue from externally funded activities (776) (802) 26 Total Net Non-Interest Expenses (Table 1) $ 1,395 $ 1,239 $ 156 a. Includes all components of pension costs. See Notes to Financial Statements, Note J: Pension and Other Post-Retirement Benefits. b. Includes expenses related to IBRD executed trust funds of $470 million for FY21 and FY20, respectively. Table 6: Budget Anchor Ratio In millions of U.S. dollars For the fiscal year ended June 30, 2021 2020 Variance Total net Non-Interest Expenses (From Table 5) $ 1,395 $ 1,239 $ 156 Pension adjustment (From Table 8) a (207) (79) (128) EFO adjustment a (6) 6 (12) Net administrative expenses – for Budget Anchor $ 1,182 $ 1,166 $ 16 Loan spread revenue, net 1,671 1,450 221 Loan commitment fees (From Table 4) 115 115 - Guarantee fees (From Table 4) 14 15 (1) Budget anchor revenue $ 1,800 $ 1,580 $ 220 Budget Anchor 66% 74% a. These adjustments are made to arrive at net administrative expenses used for allocable income purposes. For more information see Table 8 in Net Income Allocation section. Figure 9: Budget Anchor In millions of U.S. dollars 79% 2,000 80% 74% 1,500 75% 66% 1,000 70% 500 65% - 60% FY19 FY20 FY21 Net administrative expenses Budget anchor revenue Budget anchor ratio IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2021 15 Management’s Discussion and Analysis Section III: Financial Results Provision for losses on loans and other exposures In FY21, IBRD recorded a provision of $147 million for losses on loans and other exposures under the Current Expected Credit Losses (CECL) methodology (see section XII: Critical Accounting Policies and the Use of Estimates). In FY20, under the previous GAAP methodology, the provision was $23 million. The increase in the FY21 provisioning requirement was largely due to the loss given default (“severity”), which under CECL is more sensitive to interest rates as virtually the entire IBRD loans carry a variable interest rate. The impact in FY21 reflects the increase in the implied forward interest rates during the year. The accumulated provision for losses on loans and other exposures of $1,647 million as of June 30, 2021 was less than 1% of total exposures, largely unchanged compared with the prior year ($1,698 million as of June 30, 2020 and less than 1% of total exposures). See Notes to Financial Statements, Note D: Loans and Other Exposures. Board of Governors-approved and other transfers In FY21, IBRD recorded expenses of $411 million for Board of Governors-approved and other transfers, which primarily relates to the transfer to IDA from FY20 allocable income (see Notes to the Financial Statements, Note G: Retained Earnings, Allocations and Transfers). Unrealized mark-to-market gains/losses on non-trading portfolios The unrealized mark-to-market gains and losses mainly relate to the loan, borrowing, and other ALM portfolios. Since these are non-trading portfolios, any unrealized mark-to-market gains and losses associated with these positions, are adjusted out of reported net income to arrive at allocable income. As a result, from a long-term financial sustainability perspective, income allocations are broadly based on amounts that have been realized (except for the Investments- Trading portfolio, as previously discussed). For FY21, $1,218 million of net unrealized mark-to-market gains ($1,137 million net unrealized mark-to-market losses in FY20) were excluded from reported net income to arrive at allocable income (see Table 1). Table 7: Unrealized Mark-to-Market gains/losses on non-trading portfolios, net In millions of U.S. dollars For the fiscal year ended June 30, 2021 Unrealized gains Realized gains Total (losses)a (losses) Borrowings, including derivatives $ 140 $ 14 $ 154 Loan derivatives 2,415 - 2,415 Other ALM derivatives, net (1,351) - (1,351) Client operations portfolio 14 - 14 Total $ 1,218 $ 14 $ 1,232 For the fiscal year ended June 30, 2020 Unrealized gains Realized gains Total (losses)a (losses) Borrowings, including derivatives $ (362) $ 146 $ (216) Loan derivatives (1,957) (14) (1,971) Other ALM derivatives, net 1,204 - 1,204 Client operations portfolio (22) 63 41 Total $ (1,137) $ 195 $ (942) a. Excludes amounts reclassified to realized mark-to-market gains (losses). 16 IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2021 Management’s Discussion and Analysis Section III: Financial Results Loan Portfolio Loans are reported at amortized cost, whereas the derivatives which convert loans to variable-rate instruments are reported at fair value. As a result, while from an economic perspective, IBRD’s loans after the effect of derivatives carry variable interest rates, and therefore have a low sensitivity to interest rates, this is not evident in the reported net income. Net income includes only the unrealized mark to market gains and losses on loan related derivatives, which in FY21 was a gain of $2,415 million, primarily due to the increase in interest rates during the year. See Section IX: Risk Management for additional details on how IBRD uses derivatives in the loan portfolio. Borrowing Portfolio IBRD’s bonds and the related derivatives are reported at fair value, and therefore, unrealized mark-to-market gains and losses on the borrowing related derivatives are offset by unrealized mark-to-market gains and losses on the associated bonds, except for changes in IBRD’s own credit, referred to as the Debit Valuation Adjustment (DVA) which are recorded in Accumulated Other Comprehensive Loss (AOCL) as required by U.S. GAAP. In FY21, the DVA represents $1,432 million of unrealized mark-to-market losses, resulting mainly from the tightening of IBRD’s credit spreads relative to LIBOR during the year. As of June 30, 2021, IBRD’s Balance Sheet included a cumulative DVA of $218 million loss reflected in AOCL, associated with the changes in its own credit for financial liabilities measured under the fair value option (See Notes to the Financial Statements, Note L –Fair Value Disclosures). Other ALM Portfolio IBRD uses derivatives to stabilize its interest revenue from the portion of loans which is sensitive to interest rates. The Other ALM portfolio consists of derivatives which convert variable rate cash flows to fixed rate cash flows. In FY21, IBRD recorded unrealized mark to market losses of $1,351 million on this portfolio, primarily due to the increase in interest rates during the year. As of June 30, 2021, the duration of this portfolio was 3.7 years, within the Board established limit of 5 years. Net Income Allocation Net income allocation decisions are based on allocable income. Management recommends to the Board allocations out of net income at the end of each fiscal year to augment reserves and support developmental activities. As illustrated in Table 8, the key differences between allocable income and reported net income relate to unrealized mark-to-market gains and losses on IBRD’s non-trading portfolios, and expenses related to Board of Governors-approved and other transfers. All of the adjustments between reported income and net income are recommended by management and approved by the Board. Board of Governors-approved and other transfers Board of Governors-approved and other transfers refer to the allocations recommended by the Board and approved by the Governors, as part of the prior year’s net income allocation process and subsequent decisions on uses of surplus, as well as on payments from restricted retained earnings. Since these amounts primarily relate to allocations out of IBRD’s FY20 allocable income, Surplus, or restricted retained earnings, they are excluded from FY21 reported net income in calculating FY21 allocable income. Non-functional currency translation adjustment gains/losses Translation gains and losses relating to non-functional currencies are reflected in reported net income. Since these are unrealized gains/losses relate to asset/liability positions still held by IBRD, they are excluded from reported net income to arrive at allocable income. Unrealized mark-to-market gains/losses on non-trading portfolios These mainly comprise unrealized mark-to-market gains and losses on the loan, borrowing, and other ALM portfolios as discussed previously. Pension, PEBP and PCRF adjustments The Pension adjustment reflects the difference between the accounting expense, and IBRD’s cash contributions to the pension plans, PEBP, and PCRF. It also includes investment revenue earned on pension plan, PEBP, and PCRF assets. The PCRF was established by the Board to stabilize contributions to the pension and post-retirement benefits plans. IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2021 17 Management’s Discussion and Analysis Section III: Financial Results Management bases the income allocation decision on IBRD’s cash contributions to the pension plans, PEBP and PCRF, rather than pension expenses. In addition, Management has designated the income from these assets to meet the future needs of the pension plans. As a result, PEBP and PCRF investment revenues are excluded from allocable income. Table 8: Allocable Income In millions of U.S. dollars For the fiscal years ended June 30, 2021 2020 Net Income (Loss) $ 2,039 $ (42) Adjustments to Reconcile Net Income (Loss) to Allocable Income: Board of Governors-approved and other transfers 411 340 Non-functional currency translation adjustments gains, net a (35) (57) Unrealized mark-to-market (gains) / losses on non-trading portfolios, net b (1,218) 1,137 Pension 207 79 PEBP and PCRF income (168) (17) Other 12 (59) Allocable Income $ 1,248 $ 1,381 Recommended Allocations General Reserve 874 950 Surplus 100 431c Transfer to IDA 274 - Total Allocations $ 1,248 $ 1,381 a. Translation adjustments relating to assets and liabilities denominated in non-functional currencies. b. Adjusted to exclude amounts reclassified to realized gains (losses). See Table 7. c. On January 25, 2021, the Board of Governors approved a transfer of $331 million to IDA from Surplus, which was made on February 1, 2021. Other Adjustments • Under certain arrangements (such as Externally Financed Outputs), IBRD enters into agreements with donors under which it receives grants to finance specified IBRD outputs or services. These funds may be utilized only for the purposes specified in the agreements and are, therefore, considered restricted until IBRD has fulfilled those purposes. Management excludes from allocable income amounts arising from these arrangements, because IBRD has no discretion over the use of the related funds. In line with this, the expense is transferred to restricted retained earnings and in FY21, the net balance of these restricted funds decreased by $6 million. • The revenue (expense) associated with the right to receive reimbursement from the Financial Intermediary Fund (FIF) related to the PEF4 is excluded, as this is required for payment obligations relating to the pandemic catastrophe bonds, and the pandemic catastrophe insurance; and therefore, it is not available for other uses. In FY21, $1 million of expense was recognized in reported net income. Management recommended, and the Board approved that this expense of $1 million be excluded from the reported net income to arrive at the FY21 allocable income. As of July 2020, all instruments associated with the PEF had matured. • The income recognized for the right to receive reimbursement from the FIF related to the PAF for Methane and Climate Change Mitigation5 is excluded, as this is required for the payout for the changes in market value on put options under the PAF. Therefore, it is not available for other uses. In FY21, $5 million of expense was recognized in reported net income, and thus excluded to arrive at the FY21 allocable income. The change in the market value of the put option is also excluded from reported net income to arrive at allocable income, as part of the unrealized mark-to market gains/(losses) on non-trading portfolios. 4 The PEF was launched as a FIF, with the aim of establishing a fast-disbursing mechanism that can provide funding for response efforts that help prevent low-frequency and high-severity outbreaks. 5 In FY16, IBRD issued put options for methane and climate change mitigation. The PAF is a climate finance model developed by IBRD to stimulate investment in projects that reduce greenhouse gas emissions in developing countries. The PAF is a pay-for- performance mechanism which uses auctions to allocate public funds and attract private sector investment to projects that reduce methane emissions by providing a medium-term guaranteed floor price on emission rights. 18 IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2021 Management’s Discussion and Analysis Section III: Financial Results Income Allocation Since 1964, IBRD has made transfers to IDA from its net income, upon approval by the Board of Governors. In FY17, the Board approved a formula-based approach for determining IBRD’s transfers to IDA. The approach links transfers to IBRD’s allocable income for the year, ensuring that most allocable income is retained to grow IBRD’s reserves. In addition, as part of the commitment made under the 2018 capital package, the incremental revenue from the price increase implemented in July 2018 was excluded from the formula used to calculate IDA transfers out of FY21 allocable income and is fully retained in IBRD’s reserves. IBRD’s strong support of IDA is reflected in the $16.1 billion of cumulative income transfers it has made since IDA’s first replenishment. Annual IDA transfer recommendations are still subject to approval by the Governors as part of the net income allocation process in accordance with IBRD’s Articles. In making their decisions, Governors will continue to take the overall financial standing of IBRD into consideration. On August [5], 2021, the Board approved the allocation of $874 million to the General Reserve out of FY21’s Allocable Income of $1,248 million. Based on the formula-based approach, the Board recommended to IBRD’s Governors a transfer of $274 million to IDA and $100 million to Surplus. Figure 10: FY21 Allocable Income and Income Allocation In millions of U.S. dollars Revenue Loan Interest Revenue, net Other ALM, net Investment 1,754 604 Income 86 Uses LLP Administrative Expenses, Allocable Income 1,248 147 net of Other Revenue 1,049 274 General Reserves 874 Surplus 100 0 500 1,000 1,500 2,000 2,500 IDA Transfers IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2021 19 Management’s Discussion and Analysis Section IV: Lending Activities Section IV: Lending Activities IBRD provides financing instruments and knowledge services to middle-income and creditworthy low-income countries to reduce poverty and promote shared prosperity, while ensuring that social, environmental, and governance considerations are taken into account. Country teams with an understanding of each country’s circumstances work with clients to tailor the mix of instruments, products, and services. Engagement with borrowing members is increasingly aligned with IBRD’s strategic priorities, including engagement that supports global public goods such as climate, fragility and gender. Projects and programs supported by IBRD are designed to achieve a positive social impact and undergo a rigorous review and internal approval process, aimed at safeguarding equitable and sustainable economic growth, that includes early screening to identify environmental and social impacts and designing mitigation actions. Identifying and appraising a project, and approving and disbursing a loan, can often take several years. However, IBRD has shortened the preparation and approval cycle for countries in emergency situations (e.g., natural disasters) and in crises (e.g., food, fuel, and global economic crises). Loan disbursements must meet the requirements set out in loan agreements. During implementation of IBRD- supported operations, IBRD’s staff review progress, monitor compliance with IBRD policies, and help resolve any problems that may arise. The Independent Evaluation Group, an IBRD unit whose Director General reports to the Board, evaluates the extent to which operations have met their development objectives. All IBRD loans, are made to, or guaranteed by, member countries. IBRD may also make loans to IFC without any guarantee. In most cases, IBRD’s Board approves each loan and guarantee after appraisal of a project by staff. Under the Multiphase Programmatic Approach, the Board may approve an overall program framework, its financing envelope and the first appraised phase, and then authorize Management to appraise and commit financing for later program phases. For FY22, eligible countries with 2020 per capita Gross National Income (GNI) of more than $1,205 are eligible for new lending from IBRD. Net Lending Commitments and Gross Disbursements In FY21, IBRD had new net loan commitments through 125 operations, totaling $30.5 billion, which were higher by $2.5 billion (9%) compared to FY20, mainly driven by the increase in Program-for-Results (PforR) commitments (Figure 11). Table 9: Net Commitments by Region In millions of U.S. dollars For the fiscal year ended June 30, 2021 % of total 2020 % of total Variance Eastern and Southern Africa $ 1,525 5% $ 1,716 6% $ (191) Western and Central Africa 500 2 9 * 491 East Asia and Pacific 6,753 22 4,770 17 1,983 Europe and Central Asia 4,559 15 5,699 21 (1,140) Latin America and the Caribbean 9,464 31 6,798 24 2,666 Middle East and North Africa 3,976 13 3,419 12 557 South Asia 3,746 12 5,565 20 (1,819) Total $ 30,523 100% $ 27,976 100% $ 2,547 * Denotes percentage less than 0.5%. 20 IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2021 Management’s Discussion and Analysis Section IV: Lending Activities Table 10: Gross Disbursements by Region In millions of U.S. dollars For the fiscal year ended June 30, 2021 % of total 2020 % of total Variance Eastern and Southern Africa $ 325 1% $ 932 4% $ (607) Western and Central Africa 132 1 155 1 (23) East Asia and Pacific 4,439 19 4,679 23 (240) Europe and Central Asia 3,625 15 3,100 15 525 Latin America and the Caribbean 8,741 37 5,799 29 2,942 Middle East and North Africa 2,764 12 2,415 12 349 South Asia 3,665 15 3,158 16 507 Total $ 23,691 100% $ 20,238 100% $ 3,453 Lending Categories IBRD’s lending is classified in three categories: investment project financing, development policy financing, and program-for-results (Figure 11). Investment Project Financing (IPF) IPF provides financing for a wide range of activities aimed at creating the physical and social infrastructure necessary to reduce poverty and create sustainable development. IPF is usually disbursed over the long-term (roughly a 5 to 10- year horizon). FY21 net commitments under this lending category were $14.5 billion, compared with $15.0 billion in FY20. Development Policy Financing (DPF) DPF aims to support borrowers in achieving sustainable development through a program of policy and institutional actions. Examples of DPF projects include strengthening public financial management, improving the investment climate, addressing bottlenecks to improve service delivery, and diversifying the economy. DPF supports reforms through non-earmarked general budget financing. DPF provides fast-disbursing financing (roughly 1 to 3 years) to help borrowers address actual or anticipated financing requirements. FY21 net commitments under this lending category were $10.8 billion, compared with $10.1 billion in FY20. Program-for-Results (PforR) PforR helps countries improve the design and implementation of their development programs and achieve specific results by strengthening institutions and building capacity. PforR disburses when agreed results are achieved and verified. Results are identified and agreed upon during the loan preparation stage. FY21 net commitments under this lending category were $5.2 billion compared with $2.9 billion in FY20. Figure 11: Share of Lending Categories for Annual Net Commitments Percent $23 $23 $23 $28 $31 100% 9 15 11 10 17 75% 34 22 36 39 35 50% 57 63 25% 50 54 48 0% FY17 FY18 FY19 FY20 FY21 Investment Project Development Policy Program-for-Results IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2021 21 Management’s Discussion and Analysis Section IV: Lending Activities Currently Available Lending Products As of June 30, 2021, 85 member countries were eligible to borrow from IBRD. See Appendix for a list of eligible countries. IBRD Flexible Loans (IFLs) IFLs allow borrowers to customize their repayment terms (i.e., grace period, repayment period, and amortization profile) to meet their debt management or project needs. The IFL previously offered two types of loan terms: variable- spread terms and fixed-spread terms. Effective April 1, 2021, in preparation for market reference rate transitions, the Board approved a suspension of the offering of loans on fixed spread terms, as well as suspension of a related conversion feature from the variable spread terms to fixed spread terms (see section IX: Risk Management). As of June 30, 2021, 70% of IBRD’s loans outstanding carried variable-spread terms and 30% had fixed-spread terms. See Table 13 for details of loan terms for IFL loans. IFLs include options to manage the currency and/or interest rate risk over the life of the loan. The outstanding balance of loans, for which currency or interest rate conversions have been exercised was $38.8 billion as of June 30, 2021 and $32.3 billion as of June 30, 2020. IFLs may be denominated in the currency or currencies chosen by the borrower if IBRD can efficiently intermediate in that currency. Using currency conversions, some borrowing member countries have converted their IBRD loans into domestic currencies to reduce their foreign currency exposure for projects or programs that do not generate foreign currency revenue. These local currency loans may carry fixed or variable-spread terms. The balance of such loans outstanding was $3.5 billion as of June 30, 2021 and $2.9 billion as of June 30, 2020, respectively. Box 2 below shows the components of the spread on IBRD’s IFLs and how these are determined. Box 2: Components of Loan spread Contractual lending spread Subject to the Board’s periodic review Maturity Premium Market Risk Premium Set by Management Funding Cost Margin For fixed-spread IFLs, Management ensures that the funding cost margin and the market risk premium reflect the underlying market conditions that are continuously evolving. These are communicated to the Board at least quarterly. The ability to offer long-term financing distinguishes development banks from other sources of funding for member countries. Since IBRD introduced maturity-based pricing in 2010, most borrowing countries have continued to choose loans with the longest maturities which carry a higher maturity premium, highlighting the value of longer maturities to borrowing countries. However, the FY21 increase in net commitments in the less than 8 years maturity group is largely attributable to the net commitments for fast disbursing loans, provided under the crisis funding (See Table 11). Table 11: Net Commitments by Maturity In millions of U.S. dollars For the fiscal year ended June 30, 2021 For the fiscal year ended June 30, 2020 Variable Variable Maturity Fixed Spread Total Fixed Spread Total Spread Spread < 8 years $ 4,680 $ 3,188 $ 7,868 $ 1,600 $ 670 $ 2,270 8-10 years 187 3,492 3,679 1,568 3,640 5,208 10-12 years 1,225 7,337 8,562 408 3,366 3,774 12-15 years 1,326 637 1,963 1,215 1,744 2,959 15-18 years 280 2,489 2,769 403 2,441 2,844 >18 years 663 5,014 5,677 5,497 4,541 10,038 Guarantee Commitments - - 5 - - 883 Total Net Commitments $ 8,361 $ 22,157 $ 30,523 $ 10,691 $ 16,402 $ 27,976 22 IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2021 Management’s Discussion and Analysis Section IV: Lending Activities Other Lending Products Currently Available In addition to IFLs, IBRD offers loans with other features and terms (See Box 3). Box 3: Other Lending Products Currently Available Lending Product Description The Development Policy Loan Deferred Drawdown Option (DPL DDO) gives borrowers the flexibility to rapidly obtain the financing they require. For example, such funds could be needed owing to a shortfall Loans with a Deferred in resources caused by unfavorable economic events, such as declines in growth or unfavorable shifts Drawdown Option in commodity prices or terms of trade. The Catastrophe Risk DDO (CAT DDO) enables borrowers to access immediate funding to respond rapidly in the wake of a natural disaster. Under the DPL DDO, $9.6 billion borrowers may defer disbursement for up to three years, renewable for an additional three years. The outstanding as of CAT DDO has a revolving feature and the three-year drawdown period may be renewed up to four June 30, 2021 times, for a total maximum drawdown period of 15 years (Table 13). As of June 30, 2021, the amount of DDOs disbursed and outstanding was $9.6 billion (compared to $8.1 billion on June 30, 2020), and the undisbursed amount of effective DDOs was Nil, compared to $1.8 billion a year earlier. Special Development Policy Loans (SDPLs) SDPLs support structural and social reforms by creditworthy borrowers that face a possible global financial crisis or are already in a crisis and have extraordinary and urgent external financing needs. As Nil as of June 30, of June 30, 2021, the outstanding balance of such loans was Nil (compared to $11 million a year earlier). 2021 IBRD made no new SDPL commitments in either FY21 or FY20. Loan-Related Derivatives IBRD assists its borrowers with access to better risk management tools by offering derivative Loans outstanding instruments, including currency and interest rate swaps and interest rate caps and collars, associated for which borrowers with their loans. These instruments may be executed either under a master derivatives agreement, have entered into which substantially conforms to industry standards, or under individually negotiated agreements. Under currency or interest these arrangements, IBRD passes through the market cost of these instruments to its borrowers. The rate derivative balance of loans outstanding for which borrowers had entered into currency or interest rate derivative transactions was transactions under a master derivatives agreement with IBRD was $11.1 billion as of June 30, 2021, $11.1 billion as of compared with $11.2 billion a year earlier. June 30, 2021 Loans to IFC IBRD provides loans to IFC in connection with the release of a member's National Currency Paid-In Nil as of June 30, Capital (NCPIC) to IBRD. (See Section VIII for explanation of NCPIC). 2021 Lending Terms Applicable to IBRD Products Until the end of FY19, loans for all eligible members were subject to the same pricing. However, as part of the 2018 capital package, IBRD implemented a new pricing structure that classifies member countries into four pricing groups, based on income and other factors, and relates the maturity premium to the exemptions, discounts or surcharges applicable to each pricing group (See Table 12 below). Table 12: Country Pricing Group and Maturity Premium (in basis points) Maturity Country pricing group Description Premium a A Blends b, small states, countries in fragile and conflict-affected situations (FCS) and recent 0-50 c IDA graduates. These countries are exempt from the maturity premium increase regardless of their income levels. B Countries below-GDI which do not qualify for an exemption listed in Group A. 0-70 Countries above-GDI, but below high-income status and which do not qualify for an C exemption listed in Group A. 0-90 Countries with high income status and which do not qualify for an exemption listed in D 5-115 Group A. a. Based on the weighted average maturity of the loan b. Countries eligible for IDA and IBRD loans c. Applicable to loans on pre-FY18 terms. IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2021 23 Management’s Discussion and Analysis Section IV: Lending Activities Table 13: Loan Terms Available During Fiscal Year Ended June 30, 2021 Basis points, unless otherwise noted IBRD Flexible Loan (IFL) a Special Development Variable-spread Terms Fixed-spread Terms b Policy Loans (SDPL) Final maturity 35 years 35 years 5 to 10 years Maximum weighted average maturity 20 years 20 years 7.5 years Six-month variable rate Six-month variable rate Six-month variable rate Reference market rate index index index Spread Contractual lending spread 50 50 min.200 Maturity premium 0-115 c 0-115 c – Market risk premium – 10-15 d – Actual funding spread to variable rate index Projected funding spread Funding cost margin of IBRD borrowings in to six-month variable rate – the previous six-month index e period Charges Front-end fee 25 25 100 Late service charge on principal payments received after 30 days of due date f 50 50 – Commitment Fee g i 25 25 25 Development Policy Loan Catastrophe Risk Deferred Drawdown Option Deferred Drawdown Option Reference market rate Six-month variable rate index Six-month variable rate index Contractual lending spread IFL variable or fixed-spread in effect at the time of withdrawal Front-end fee 25 50 h Renewal fee – 25 Stand-by fee 50 g – a. There is an implicit floor of zero on the overall interest rate in IBRD’s loans. b. Effective April 1, 2021, IBRD suspended offering loans with fixed spread terms. c. Based on the weighted average maturity of the loan and on country pricing group. d. Based on the weighted average maturity of the loan. e. Projected funding spread to variable rate index (e.g., London Interbank Offered Rate (LIBOR) was based on the weighted average maturity of the loan. f. See Box 7 in Section IX for a discussion of overdue payments. g. Certain waivers of commitment / stand-by fees payable during the first year of financing for health-related COVID-19 operations are approved under the Fast Track COVID-19 Facility. h. For Cat-DDOs approved under the Fast Track COVID-19 Facility, the Front-End Fee is reduced to 25bps. i. For operations approved under the Additional Financing to the COVID-19 Strategic Preparedness and Response Program (SPRP), the commitment fee is waived for a period of up to 18 months starting from the date of approval of the relevant operation. Discontinued Lending Products IBRD’s loan portfolio includes lending products whose terms are no longer available for new commitments. These products include currency pool loans and fixed-rate single-currency loans. As of June 30, 2021, loans outstanding of $489 million (0.2% of the portfolio) carried terms no longer offered, with final maturity in May 2026. Waivers Loan terms offered prior to September 28, 2007 included a partial waiver of interest and commitment charges on eligible loans. For these loans, waivers are approved annually by the Board. For FY22, the Board has approved the same waiver rates as in FY21 for all eligible borrowers with eligible loans. The foregone income in FY21 due to previously approved waivers was $31 million (FY20: $37 million). Table 14 and Figure 12 illustrates a breakdown of IBRD’s loans outstanding and undisbursed balances by loan terms, as well as loans outstanding by currency composition. The interest and currency profile of loans outstanding after the use of derivatives for risk management purposes is discussed under Market Risk in Section IX. 24 IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2021 Management’s Discussion and Analysis Section IV: Lending Activities Table 14: Loans outstanding by interest rate structure, excluding derivatives In millions of U.S. dollars, except for ratios June 30, 2021 June 30, 2020 Of which Of which Product terms % reference % % of Total Product terms % reference % % of Total rate is rate is Fixed Spread Fixed 50.1 15 Fixed Spread Fixed 47.2 13 30.0 28.4 Loans Loans Variable 49.9 15 Variable 52.8 15 Variable Spread Fixed 2.9 2 Variable Spread Fixed 2.9 2 70.0 71.6 Loans Loans Variable 97.1 68 Variable 97.1 70 Total 100% 100% Total 100% 100% Figure 12: Loan Portfolio In millions of U.S. dollars Figure 12a. Undisbursed Balances by Loan Terms In millions of U.S. dollars, except for ratios June 30, 2021 June 30, 2020 Fixed Spread Fixed Spread terms, 27% terms, 28% $74,441 $69,816 Variable Variable Spread Spread terms, 73% terms, 72% Figure 12b. Loans Outstanding by Currency In millions of U.S. dollars, except for ratios June 30, 2021 June 30, 2020 Other, 2% Other, 2% Euro, 19% Euro, 19% U.S. Dollars, 79% U.S. Dollars, 79% IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2021 25 Management’s Discussion and Analysis Section V: Other Development Activities Section V: Other Development Activities IBRD continues to deliver value to its client countries through its knowledge services, convening power, and capacity to implement solutions that address global issues where coordinated action is critical. IBRD also assists clients with designing financial products and structuring transactions to help mobilize resources for development projects and mitigate the financial effects of market volatility and disasters. Other financial products and services provided to borrowing member countries, and to affiliated and non-affiliated organizations, include financial guarantees, grants, externally-funded activities (described below), and advisory services and analytics. Guarantees IBRD’s exposure on its guarantees was $6.7 billion as of June 30, 2021 compared to $6.9 billion as of June 30, 2020 (see Table 15). Exposure is measured by discounting each guaranteed amount from its next call date. IBRD offers project-based and policy-based guarantees for priority projects and programs in member countries. Project-based guarantees are provided to mobilize private financing for projects; they are also used to mitigate projects’ payment- and performance-related risks. Policy-based guarantees are provided to mobilize private financing for sovereigns or sub- sovereigns. IBRD’s guarantees are partial and are intended to provide only the coverage necessary to obtain the required private financing, considering country, market and, if appropriate, project circumstances. All guarantees require a sovereign counter-guarantee and indemnity, comparable to the requirement of a sovereign guarantee for IBRD lending to sub-sovereign and non-sovereign borrowers (see Box 4). The Corporate Risk Guarantee Committee will inform the use of the guarantee instrument. Box 4: Types of Guarantees Provided by IBRD Guarantee Description Two types of project-based guarantees are offered: 1. Loan guarantees: these cover loan-related debt service defaults caused by the government’s failure to meet specific payment and/or performance obligations arising from contract, law or regulation, in relation to a project. Loan guarantees include coverage for debt service defaults on: Project-based (i) commercial debt, normally for a private sector project where the cause of debt service default guarantees is specifically covered by IBRD’s guarantee; and, (ii) a specific portion of commercial debt irrespective of the cause of such default, normally for a public-sector project. 2. Payment guarantees: These cover payment default on non-loan related government payment obligations to private entities and foreign public entities arising from contract, law or regulation. These cover debt service default, irrespective of the cause of such default, on a specific portion of Policy-based commercial debt owed by national or sub national government and associated with the supported guarantees government’s program of policy and institutional actions. IBRD extends guarantees for projects in IDA-only member countries that (i) are expected to generate large economic benefits with significant developmental impact in the member country; and (ii) cannot Guarantees for be fully financed out of the country’s own resources, IDA resources, or other concessional financing. enclave operations Those projects are known as enclave operations. The provision of IBRD support to enclave operations is subject to credit enhancement features that adequately mitigate IBRD’s credit risk. Table 15: Guarantees Exposure In million U.S. dollars As of June 30, 2021 2020 Guarantees (project, policy and enclave) $ 3,079 $ 3,264 Exposure Exchange Agreements 3,640 3,651 Total $ 6,719 $ 6,915 26 IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2021 Management’s Discussion and Analysis Section V: Other Development Activities Table 16: Pricing for IBRD Project-Based and Policy-Based Guarantees Basis Points Charges FY21 FY20 Front-end fee 25 25 Processing fee a b 50 50 Initiation fee c b 15 15 Standby fee 25 25 Guarantee fee d 50-165 50-165 a. Determined on a case by case basis. In exceptional cases, projects can be charged over 50 bps of the guarantee amount. b. Not applicable for public projects. c. The initiation fee is 15 basis points of the guaranteed amount or $100,000, whichever is greater. d. Based on the weighted average maturity of the guarantee and country pricing group. In addition, IBRD has entered into the following arrangements, which are treated as financial guarantees under U.S. GAAP: • Advance Market Commitment (AMC): AMC is a multilateral initiative to accelerate the creation of a market and sustainable production capacity for pneumococcal vaccines for developing countries. IBRD provides a financial platform for AMC by holding donor-pledged assets as an intermediary agent and passing them on to the Global Alliance for Vaccines and Immunization (GAVI) when appropriate conditions are met. Moreover, should a donor fail to pay, or delay paying any amounts due, IBRD has committed to pay from its own funds any amounts due and payable by the donor, to the extent there is a shortfall in total donor funds received. The amount of the exposure is discussed under the guarantee program (see Notes to Financial Statements, Note I: Management of External Funds and Other Services). • Exposure Exchange Agreements (EEA): IBRD has an exposure exchange agreement outstanding with MIGA under which IBRD and MIGA exchanged selected exposures through reciprocal guarantees, with each divesting itself of exposure in countries where their lending capacities are limited, in return for exposure in countries where they had excess lending capacity. IBRD also has an EEA with the African Development Bank (AfDB) and Inter-American Development Bank (IADB), an MDB EEA. Under this EEA, each MDB exchanged credit risk exposure of a reference portfolio supported by underlying loans to borrowing member countries. For each MDB, EEAs through diversification benefits, help reduce credit risk at the portfolio level; improve the risk-weighted capital ratios especially by addressing exposure concentration concerns; and create lending headroom for individual borrowing countries where MDBs may be constrained. The EEA involved the receipt of a guarantee and the provision of a guarantee against nonpayment in the reference portfolio by each MDB to the other. The guarantee received and the guarantee provided are two separate transactions: (a) a receipt of an asset for the right to be indemnified, and receive risk coverage (recoverable asset) and (b) the provision of a financial guarantee, respectively (see Notes to the Financial Statements, Note D: Loans and Other Exposures). • Other guarantee arrangements: As of June 30, 2021, IBRD had received guarantees totaling $1,544 million ($1,544 million for FY20). These guarantees serve as a credit enhancement which increase IBRD’s lending capacity in certain countries. Table 17: Exposure Exchange Agreements In millions of U.S. dollars As of June 30, 2021 2020 Guarantee Guarantee Guarantee Guarantee Received Provided Received Provided Exposure Exchange Agreement MIGA $ 31 $ 31 $ 42 $ 42 IADB 2,021 2,021 2,021 2,021 AfDB 1,588 1,588 1,588 1,588 Total notional $ 3,640 $ 3,640 $ 3,651 $ 3,651 Grants Grant-Making Facilities (GMFs) are complementary to IBRD’s work. IBRD deployed $18 million under this program, in each of FY21 and FY20. These amounts are reflected in contributions to special programs on IBRD’s Statement of Income, after IDA’s share is determined in accordance with the cost sharing ratio. IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2021 27 Management’s Discussion and Analysis Section V: Other Development Activities Externally-Funded Activities Mobilization of external funds from third-party partners includes Trust Funds. Additional external funds include reimbursable funds and revenues from fee-based services to member countries, which are related to RAS, EFOs, and other financial products and services, including RAMP. Trust Fund Activity Trust Funds are a part of IBRD’s resource envelope, affording IBRD with resources and flexibility to provide development solutions that serve member recipients and donors alike. Trust Funded partnerships often serve as a platform for IBRD and its partners to access WBG’s diverse technical and financial resources, and achieve development goals whose complexity, scale, and scope exceed any individual partner’s capabilities. IBRD’s roles and responsibilities in managing trust funds depend on the type of fund, outlined as follows: • IBRD-Executed Trust Funds (BETFs): IBRD, alone or jointly with one or more of its affiliated organizations, manages the funds and implements the activities financed. These trust funds support IBRD’s work program. IBRD disbursed $470 million in FY21 ($470 million in FY20) of trust fund program funds. • Recipient-Executed Trust Funds (RETFs): Funds are provided to a third party, normally in the form of project grant financing, and are supervised by IBRD. • Financial Intermediary Funds (FIFs): IBRD, as trustee, administrator, or treasury manager, offers specific administrative or financial services with a limited operational role. Arrangements include the administration of debt service trust funds, fiscal agency funds and other more specialized limited fund management roles. IBRD uses a cost recovery framework for Trust Funds. Key features of the framework include: • Ensuring IBRD increases the recovery of costs incurred for trust fund activities. • Simplifying and standardizing the fee structure for all types of trust funds. Management is implementing measures to better integrate planning, support sustainability and enhance alignment of External Funds with mission priorities through greater use of umbrella trust fund programs, increased cost recovery, and new budgetary measures to manage External Funds usage. During FY 21 IBRD’s share of revenue and fees from trust fund administration was $44 million ($42 million in FY20) (see Notes to Financial Statements, Note I: Management of External Funds and Other Services). Reimbursable Advisory Services (RAS) While most of IBRD’s advisory and analytical work is financed by its own budget or donor contributions (e.g., Trust Funds), clients may also pay for services. IBRD offers technical assistance and other advisory services to its member countries, in connection with, and independent of, lending operations. Available services include, for example, assigning qualified professionals to survey developmental opportunities in member countries; analyzing member countries fiscal, economic, and developmental environments; helping members devise coordinated development programs; and improving their asset and liability management techniques. In FY21, IBRD earned revenue of $53 million ($67 million in FY20) from RAS. Externally Financed Outputs (EFOs) IBRD offers donors the ability to contribute to specific projects and programs. EFO contributions are recorded as restricted revenue when received because they are for contractually specified purposes. Restrictions are released once the funds are used for the purposes specified by donors. In FY21, IBRD had $18 million of restricted revenue, compared with $29 million in FY20. Other Financial Products and Services Managing Financial Risks for Clients IBRD helps member countries build resilience by facilitating access to risk management solutions to mitigate the financial effects of currency, interest rate, and commodity price volatility, disasters, and extreme weather events. 28 IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2021 Management’s Discussion and Analysis Section V: Other Development Activities Box 5 below lists some financial solutions and disaster risk financing instruments IBRD offers: Box 5: Financing Instruments Hedging Transactions Disaster Risk Financing Interest Rate Catastrophe Derivatives and Bonds Currency Insurance & Reinsurance Commodity Price Regional Pooling Facilities IBRD also intermediates the following risk management transactions for clients: • Affiliated Organization: To assist IDA with its asset/liability management IBRD executed currency forward contracts on its behalf. • Unaffiliated Organization: To assist the International Finance Facility for Immunization (IFFIm) with its asset/liability management strategy, IBRD executes currency and interest rate swaps on its behalf. In addition, IBRD, as Treasury Manager, is a counterparty to IFFIm and enters into offsetting swaps with market counterparties. During FY21, IBRD executed currency swaps with notional amounts of $2.1 billion under this agreement. (See Risk Management, Section IX, for a detailed discussion of IBRD’s risk mitigation of these derivative transactions). Asset Management The Reserves Advisory and Management Program (RAMP) provides services that build clients’ capacity to support the sound management of their official sector assets. Clients include central banks, sovereign wealth funds, national pension funds, and supranational organizations. RAMP helps clients to upgrade their asset management capabilities, including portfolio and risk management, operational infrastructure, and human resources capacity. Under most of these arrangements, IBRD is responsible for managing a portion of the institution’s assets and, in return, receives a fee based on the average value of the portfolio managed (see Table 18). The fees earned are used to provide training and capacity-building services. In addition to RAMP, IBRD invests and manages investments on behalf of IDA, MIGA, and trust funds; those investments are not included in IBRD’s assets. Table 18: RAMP – Assets and Revenues In millions of U.S. dollars As of June 30, 2021 2020 Assets managed under RAMP $ 27,873 $ 26,001 Revenue from RAMP $ 17 $ 15 As noted in the discussion of Trust Fund Activities above, IBRD, alone or jointly with one or more of its affiliated organizations, administers on donors’ behalf funds restricted for specific uses. This administration is governed by agreements with donors, who include members, their agencies and other entities. These funds are held in trust and are not included on IBRD’s Balance Sheet, except for $552 million of undisbursed third-party contributions made to IBRD-executed trust funds, which are recognized on the Balance Sheet. The cash and investment assets held in trust by IBRD as administrator and trustee totaled $31.3 billion in FY21, of which $93 million ($72 million in FY20) relates to IBRD’s own contributions to these trust funds (Table 19). Table 19: Cash and Investment Assets Held in Trust In millions of U.S dollars As of June 30, 2021 2020 IBRD-executed $ 263 $ 280 Jointly executed with affiliated organizations 1,025 944 Recipient-executed 3,082 2,712 Financial intermediary funds 19,757 19,084 Execution not yet assigned a 7,187 6,434 Total fiduciary assets $ 31,314 $ 29,454 a.These represent assets held in trust for which the determination as to the type of execution is yet to be finalized. IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2021 29 Management’s Discussion and Analysis Section V: Other Development Activities Other Financing Solutions From time to time IBRD leverages its debt issuance platform for other financing support for clients and other development organizations with complementary objectives. For example, in FY21 IBRD issued a $100 million 5- year bond which supports IBRD’s ongoing sustainable development activities and transferred an amount equal to 50 percent of the proceeds to support the United Nations Children’s Fund (UNICEF), providing financing to UNICEF during a critical period. UNICEF is responsible for repaying their portion of the bond issuance to IBRD. 30 IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2021 Management’s Discussion and Analysis Section VI: Investment Activities Section VI: Investment Activities IBRD’s investment portfolio consists mainly of the liquid asset portfolio. As of June 30, 2021, the net investment portfolio totaled $85.8 billion with $82.8 billion representing the liquid asset portfolio. This compares with $82.5 billion a year earlier, of which $79.9 billion represented the liquid asset portfolio (see Note C: Investments in the Notes to the Financial Statements). The increased level of liquidity reflects the higher projected debt service and loan disbursements for the coming fiscal year. Liquid Asset Portfolio Funds raised through IBRD’s borrowing activities that have not yet been deployed for lending, are held in the liquid asset portfolio to provide liquidity for IBRD’s operations. The portfolio is managed with the goal of ensuring sufficient cash flows to meet all IBRD’s financial commitments. While it seeks a reasonable return on this portfolio, IBRD restricts its liquid assets to high-quality investments, consistent with its investment objective of prioritizing principal protection over yield. Liquid assets are managed conservatively and are primarily held against disruptions in IBRD’s access to capital markets. IBRD’s liquid assets, are held mainly in highly rated, fixed-income instruments (see Box 8: Eligibility Criteria for IBRD's Investments) and include the following: • Government and agency obligations • Time deposits and other unconditional obligations of banks and financial institutions • Asset-backed securities (including agency mortgage-backed securities) • Currency, interest rate and other risk management derivatives • Exchange-traded options and futures Figure 13: Liquid Asset Portfolio by Asset Class In millions of U.S. dollars, except for ratios June 30, 2021 June 30, 2020 Asset-backed Asset-backed Securities & Others Securities & Others 4% 5% $82,751 Time $79,908 Government and Deposits Time agency obligations Government and 37% Deposits 56% agency 40% obligations 58% IBRD keeps liquidity volumes above a Prudential Minimum which is defined as 80% of the twelve-month Target Liquidity Level. The twelve- month Target Liquidity Level is calculated before the end of each fiscal year based on Management’s estimates of projected net loan disbursements approved at the time of projection and twelve months of debt-service for the upcoming fiscal year. This twelve-month estimate becomes the target for the upcoming fiscal year and the Prudential Minimum is 80% of this target (see Section IX for details of how IBRD manages liquidity risk). The liquid asset portfolio is composed largely of assets denominated in, or swapped into, U.S. dollars, with net exposure to short-term interest rates after derivatives. The portfolio has an average duration of less than three months, and the debt funding these liquid assets has a similar currency and duration profile. This is a direct result of IBRD’s exchange-rate and interest-rate-risk-management policies (see Section IX), combined with appropriate investment guidelines (see Box 8). IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2021 31 Management’s Discussion and Analysis Section VI: Investment Activities The maturity profile of IBRD’s liquid asset portfolio reflects a high degree of liquidity. As of June 30, 2021, $65.5 billion (approximately 79% of total volume) was due to mature within six months, of which $29.8 billion was expected to mature within one month. The liquid asset portfolio is held in three sub-portfolios: Stable, Operational, and Discretionary, each may have different risk profiles and performance guidelines (see Table 20). • Stable portfolio is mainly an investment portfolio holding all or a portion of the Prudential Minimum level of liquidity, set at the start of each fiscal year. • Operational portfolio is used to meet IBRD’s day-to-day cash flow requirements. • Discretionary portfolio gives IBRD the flexibility to execute its borrowing program and can be used to tap attractive market opportunities. Additional portions of the Prudential Minimum may also be held in this portfolio. Table 20: Liquid Asset Portfolio Composition In millions of U.S. dollars, except ratios which are in percentages As of June 30, 2021 % 2020 % Liquid asset portfolio Stable $ 57,143 69% $ 54,388 68% Operational 17,502 21 19,938 25 Discretionary 8,106 10 5,582 7 Total $ 82,751 100% $ 79,908 100% Table 21: Liquid Asset Portfolio - Average Balances and Returns In millions of U.S. dollars, except rates which are in percentages Average Balances Financial Returns % 2021 2020 2021 2020 Liquid asset portfolio Stable $ 56,842 $ 53,839 0.44% 2.01% Operational 20,026 12,572 0.03 1.58 Discretionary 7,892 9,395 0.31 2.09 Total $ 84,760 $ 75,806 0.33% 1.93% During FY21, IBRD earned a return of 0.33% on its liquid asset portfolio, compared to 1.93% last year. The lower return in FY21 primarily reflects the lower interest rates during the year. In addition to monitoring gross investment returns relative to their benchmarks, IBRD also monitors overall earnings from the investment portfolio, net of funding costs. In FY21, IBRD earned $86 million of investment revenue, net of funding costs, as discussed in Section III. Other Investments In addition to the liquid asset portfolio, the investment portfolio also includes holdings related to AMC, PEBP, PCRF, and the Local Currency Market Development program (LCMD, see Notes to Financial Statements Note C: Investments for additional details). Table 22 below summarizes the net carrying value of other investments (see Notes to Financial Statements, Note I: Management of External Funds and Other Services for additional details on AMC): Table 22: Net Carrying Value of Other Investments In millions of U.S. dollars As of June 30, 2021 2020 AMC $ 10 $ 239 PEBP 2,476 1,847 PCRF 555 450 LCMD 39 41 Total $ 3,080 $ 2,577 32 IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2021 Management’s Discussion and Analysis Section VII: Borrowing Activities Section VII: Borrowing Activities IBRD has been issuing bonds in the international capital markets since 1947. The proceeds of these bonds support IBRD’s lending operations which are aimed at promoting sustainable development for IBRD’s borrowing member countries. IBRD borrows at attractive rates underpinned by its strong financial profile and shareholder support that together are the basis for its triple-A credit rating. As a result of its financial strength and triple-A credit rating, IBRD is recognized as a premier borrower and its bonds and notes are viewed as a high credit quality investment in the global capital markets. IBRD uses the proceeds to finance development activities in creditworthy middle-income and low-income countries eligible to borrow from IBRD at market-based rates. Funding raised in any given year is used for IBRD’s operations, including loan disbursements, replacement of maturing debt, and prefunding for lending activities. IBRD determines its funding requirements based on a three-year rolling horizon and funds about one-third of the projected amount in the current fiscal year. As discussed in Section II, IBRD uses currency and interest rate derivatives in connection with its borrowings for asset and liability management purposes. New medium- and long-term funding is swapped into variable-rate U.S. dollar instruments, with conversion to other currencies carried out subsequently. This is in accordance with loan funding requirements, and so that IBRD can minimize interest rate and currency risk. IBRD also uses derivatives to manage the re-pricing risks between loans and borrowings. Further discussion on how IBRD manages this risk is included in the Risk Management Section, Section IX. In FY21, IBRD raised a total of $67.5 billion of medium- and long-term debt (Table 24). IBRD issues short-term debt (maturing in one year or less), and medium- and long-term debt (with a maturity greater than one year). From time to time, IBRD exercises the call option in its callable bond issues; it may also repurchase its debt to meet other operational or strategic needs such as providing liquidity to its investors (Table 24). As of June 30, 2021, the borrowing portfolio totaled $253.7 billion, $16.5 billion higher than June 30, 2020 (see Note E: Borrowings in the Notes to the Financial Statements). The increase was primarily due to net new medium and long- term debt issuances during the year (Table 24). Figure 14: Effect of Derivatives on Currency Composition of the Borrowing Portfolio–June 30, 2021 Borrowings Including derivatives Borrowings excluding derivatives Euro Euro 13% 13% US Dollar Others 61% 26% US Dollar 87% * Denotes percentage less than 0.5%. As of June 30, 2021, IBRD’s total borrowing portfolio, after the effects of derivatives, carried variable rates, with a weighted average cost of 0.1% (0.9% as of June 30, 2020). The decrease in the weighted average cost from the prior year reflects the decrease in the short-term market interest rates during the year. This also resulted in a decrease in IBRD’s weighted average loan rates, which are also based on IBRD’s funding cost. IBRD’s lending spread was therefore not impacted by the decrease in short-term interest rates (Figure 5). IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2021 33 Management’s Discussion and Analysis Section VII: Borrowing Activities Short-Term Borrowings Table 23 summarizes IBRD’s short-term borrowings, which mainly include discount notes, securities lent or sold under securities lending and repurchase agreements, and other short-term borrowings. Discount Notes IBRD’s short-term borrowings consist mainly of discount notes issued in U.S. dollars. These borrowings have a weighted average maturity of approximately 127 days. As of June 30, 2021, the outstanding balance of discount notes was $10.0 billion, $1.0 billion lower compared with a year earlier. Securities Lent or Sold under Repurchase Agreements These short-term borrowings are secured mainly by highly-rated collateral in the form of securities, including government-issued debt, and have an average maturity of less than 30 days. Other Short-Term Borrowings Other short-term borrowings have maturities of one year or less. The outstanding balance as of June 30, 2021 was $199 million, an increase of $175 million compared to last year ($24 million in FY20). Table 23: Short-Term Borrowings In millions of U.S. dollars, except rates which are in percentages As of June 30, 2021 2020 2019 Discount notes a Balance at year-end $ 10,022 $ 11,009 $ 10,204 Average daily balance during the fiscal year $ 10,392 $ 13,224 $ 10,556 Maximum month-end balance $ 11,344 $ 17,065 $ 12,189 Weighted-average rate at the end of fiscal year 0.07% 0.39% 2.44% Weighted-average rate during the fiscal year 0.16% 1.59% 2.37% Securities lent or sold under repurchase agreements b Balance at year-end $ - $ - $ - Average monthly balance during the fiscal year $ - $ 53 $ - Maximum month-end balance $ - $ 632 $ - Weighted-average rate at the end of fiscal year 0.00% 0.00% 0.00% Weighted-average rate during the fiscal year 0.00% 1.71% 0.00% Other short-term borrowings a Balance at year-end $ 199 $ 24 $ 200 Average daily balance during the fiscal year $ 177 $ 36 $ 210 Maximum month-end balance $ 199 $ 71 $ 273 Weighted-average rate at the end of the fiscal year 0.11% 0.25% 2.34% Weighted-average rate during the fiscal year 0.17% 1.82% 2.32% a. At amortized cost which approximates fair value. b. Excludes securities related to PEBP. 34 IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2021 Management’s Discussion and Analysis Section VII: Borrowing Activities Medium- and Long-Term Borrowings In FY21, medium- and long-term debt raised directly by IBRD in the capital markets amounted to $67.5 billion with an average maturity to first call of 8.1 years (Table 24). The decrease in medium-and-long-term debt issuances in FY21 is primarily due to lower debt servicing and refinancing requirements. IBRD called and repurchased a lower volume of debt in FY21, compared with FY20. Table 24: Funding Operations Indicators In millions of U.S. dollars, except maturities which are in years For the fiscal year ended June 30, 2021 2020 Issuances a Medium- and long-term funding raised $ 67,471 $ 75,006 Average maturity to first call date 8.1 5.3 Average maturity to contractual final maturity 8.8 6.7 Maturities Medium- and long-term funding matured $ 41,281 $ 40,437 Average maturity of debt matured 5.0 4.0 Called/Repurchased Medium- and long-term funding called/repurchased $ 11,321 $ 26,095 a. Expected life of IBRD’s bonds are generally between first call date and the contractual final maturity. Table 25: Maturity Profile of Medium and Long-Term Debt In millions of U.S. dollars As of June 30, 2021 Less than 1 2 to 3 3 to 4 4 to 5 Due After 5 1 to 2 years Total year years years years years Medium and Long-Term Debt $ 35,019 $ 29,652 $ 28,319 $ 34,367 $ 28,210 $ 94,288 $ 249,855 As shown below, 68% of IBRD’s medium-and long-term borrowings issued during the year are in U.S. dollars: Figure 15: Medium- and Long-Term Borrowings Raised by Currency during the year, Excluding Derivatives June 30, 2021 June 30, 2020 Others 20% Others 24% Euro 12% Euro US Dollar US Dollar 14% 62% 68% IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2021 35 Management’s Discussion and Analysis Section VIII: Capital Activities Section VIII: Capital Activities Capital Structure Principal Shareholders and Voting Power As of June 30, 2021, IBRD had 189 member countries, with the top six accounting for 40% of the total voting power (Figure 16). The percentage of votes held by members rated AA and above by at least two major rating agencies was 37% (Figure 17). The United States is IBRD’s largest shareholder, with 16% of total voting power. Accordingly, it also has the largest share of IBRD’s uncalled capital, $46,363 million, or 17% of total uncalled capital. Subscribed Capital Total subscribed capital is comprised of paid-in capital and uncalled subscribed capital. See Statement of Subscriptions to Capital Stock and Voting Power in IBRD’s Financial Statements for balances by country. Figure 16: Voting Power of Top Six Members as of June 30, 2021 Figure 17: Percentage of Votes held by Member Countries, as of June 30, 2021 United States 15.77% Japan 7.41% Below AA & AA, 63% Above 37% China 5.03% Germany 4.23% France 3.91% United Kingdom 3.91% 0% 5% 10% 15% 20% 25% Table 26: Breakdown of IBRD Subscribed Capital In millions of U.S. dollars, except ratios which are in percentages As of June 30, % 2021 2020 Variance Subscribed capital Uncalled Subscribed capital 94% $ 278,612 $ 269,968 $ 8,644 Paid-in capital 6 19,244 18,034 1,210 Total subscribed capital 100% $ 297,856 $ 288,002 $ 9,854 Uncalled Subscribed Capital The total uncalled subscribed capital may be called only when required to meet IBRD’s obligations for funds borrowed or loans guaranteed and is, thus, not available for use by IBRD in making loans. Of this amount, $40,327 million was restricted pursuant to resolutions of the Governors (though such conditions are not required by IBRD’s Articles). While these resolutions are not legally binding on future Governors, they do record an understanding among members that this amount will not be called for use by IBRD in its lending activities or for administrative purposes. No call has ever been made on IBRD’s capital. Any such calls are required to be uniform, but the obligations of IBRD’s members to make payment on such calls are independent of one another. If the amount received on a call is insufficient to meet the obligations of IBRD for which the call is made, IBRD has the right to make further calls until the amounts received are sufficient to meet such obligations. On any such call or calls, however, no member is required to pay more than the unpaid balance of its capital subscription. Under the Bretton Woods Agreements Act and other U.S. legislation, the Secretary of the U.S. Treasury is permitted to pay approximately $7,663 million of the uncalled portion of the subscription of the United States, if called for use by IBRD, without need for further congressional action. 36 IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2021 Management’s Discussion and Analysis Section VIII: Capital Activities The balance of the uncalled portion of the U.S. subscription, $38,700 million, has been authorized but not appropriated by the U.S. Congress. Further action by the U.S. Congress is required to enable the Secretary of the Treasury to pay any portion of this balance. The General Counsel of the U.S. Treasury has rendered an opinion that the entire uncalled portion of the U.S. subscription is an obligation backed by the full faith and credit of the U.S., notwithstanding that congressional appropriations have not been obtained with respect to certain portions of the subscription. Capital Increases In October 2018, the Governors approved a new GCI and SCI as part of a capital package endorsed by the Governors in April 2018 that includes institutional and financial reforms designed to ensure long-term financial sustainability. The capital increases will result in additional subscribed capital of up to $60.1 billion, with $7.5 billion of paid-in capital and $52.6 billion of callable capital. Paid-In Capital Paid-in capital has two components: • The U.S. dollar portion, which is freely available for use by IBRD. • National Currency Paid-In Capital (NCPIC) portion, usage of which is subject to certain restrictions under IBRD’s Articles and is subject to Maintenance-Of-Value (MOV) requirements. For additional details see the Notes to the Financial Statements, Note A: Summary of Significant Accounting and Related Policies. Usable Paid-in Capital Usable paid-in capital represents the portion of paid-in capital that is available to support IBRD’s risk bearing capacity and includes all U.S. dollar paid-in capital, as well as NCPIC for which use restrictions have been lifted (referred to as released NCPIC). The adjustments made to paid-in capital to arrive at usable paid-in capital are provided in Table 27. The $1,295 million increase in usable paid-in capital between FY20 and FY21 was primarily due to the receipt of $884 million for GCI and $326 million for SCI during FY21. Table 27: Usable Paid-In Capital In millions of U.S dollars As of June 30, 2021 2020 Variance Paid-in Capital $ 19,244 $ 18,034 $ 1,210 Adjustment on released NCPIC for net deferred MOV (receivable) payable a 67 (14) 81 Adjustments for unreleased NCPIC: Restricted cash (60) (65) 5 Demand notes (332) (373) 41 MOV receivable (343) (299) (44) MOV payable 7 5 2 Total Adjustments for unreleased NCPIC (728) (732) 4 Usable paid-in capital $ 18,583 $ 17,288 $ 1,295 a. The MOV on released NCPIC is considered to be deferred. Usable Equity Usable equity represents the amount of equity that is available to support IBRD’s lending operations. Usable equity is central to the three frameworks IBRD uses to manage its capital adequacy, credit risk, and equity earnings. These frameworks, described in Section IX, are: • Strategic Capital Adequacy Framework • Credit Risk and Loan Loss Provisioning Framework • Other ALM Framework Usable equity consists of usable paid-in capital, and elements of retained earnings and reserves (see Table 28). The components of retained earnings and reserves included in usable equity are as follows: Special Reserve: Amount set aside pursuant to IBRD’s Articles, held in liquid form and to be used only for meeting IBRD’s liabilities on its borrowings and guarantees; IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2021 37 Management’s Discussion and Analysis Section VIII: Capital Activities General Reserve: Consists of earnings from prior fiscal years which the Board has approved for retention in IBRD’s equity. On August [5], 2021, the Board approved the transfer of $874 million to the General Reserve from FY21 net income, and a one-time transfer of $203 million from Other reserves to the General reserve, which represents the cumulative effect of adopting ASU 2016-13 (CECL) on July 1, 2020; Cumulative Translation Adjustments: Comprise translation adjustments that arise upon revaluing currency balances to U.S. dollars for reporting purposes. IBRD’s functional currencies are U.S. dollar and euro and changes in cumulative translation adjustments only relate to translation adjustments on euro-denominated balances. Translation adjustments associated with non-functional currencies are reflected in other adjustments in Table 28. Usable equity excludes cumulative translation adjustments associated with unrealized mark-to-market gains/losses on non-trading portfolios; Other Adjustments: These adjustments relate to the income earned on PEBP assets before FY11, currency translation adjustments on non-functional currencies and a one-time transfer of $203 million from Other reserves to the General reserve, which represents the cumulative effect of adopting ASU 2016-13 (CECL) on July 1, 2020. These also reflect the measure of the funded status of the pension plans which is based on the funding methodology used by the Pension Finance Committee to determine sustainable funding levels for the pension plans. The increase in usable equity in FY21, primarily reflects the increase in reserve retention out of the FY21 allocable income and the increase in usable paid-in capital. Table 28: Usable Equity In millions of U.S. dollars Variance Due to Due to Translation As of June 30, 2021 2020 Total Activities Adjustment Usable paid-in capital $ 18,583 $ 17,288 $ 1,295 $ 1,216 $ 79 Special reserve 293 293 - - - General reserve a 31,464 30,387 1,077 1,077 - Cumulative translation adjustment (268) (737) 469 - 469 Other adjustments (75) (93) 18 - 18 Equity (usable equity) $ 49,997 $ 47,138 $ 2,859 $ 2,293 $ 566 $ a. Includes transfer to the General Reserve, which for FY21 (FY20) was approved by the Board on August [5], 2021 (August 7, 2020). The FY21 General Reserve also includes a one-time transfer of $203 million from Other reserves to the General reserve, which represents the cumulative effect of adopting ASU 2016-13 (CECL) on July 1, 2020. 38 IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2021 Management’s Discussion and Analysis Section IX: Risk Management Section IX: Risk Management Risk Governance IBRD’s risk management processes and practices evolve to reflect changes in activities in response to market, credit, product, operational, and other developments. The Board, particularly Audit Committee (AC) members, periodically review trends in IBRD’s risk profiles and performance, and any major developments in risk management policies and controls. Management believes that effective risk management is critical for its overall operations. Accordingly, the risk management governance structure is designed to manage the principal risks IBRD assumes in its activities, and supports Management in its oversight function, particularly in coordinating different aspects of risk management and in connection with risks that are common across functional areas. IBRD’s financial and operational risk governance structure is built on the “three lines model” (Figure 18) where: • Business units are responsible for directly managing risks in their respective functional areas; • The Vice President and WBG Chief Risk Officer (CRO) provides direction, challenge, and oversight over financial and operational risk activities; and • Internal Audit provides independent oversight. IBRD’s risk management process comprises risk identification, assessment, response and risk monitoring and reporting. IBRD has policies and procedures under which risk owners and corporate functions are responsible for identifying, assessing, responding to, monitoring and reporting risks. Figure 18: Financial and Operational Risk Management Structure Internal Audit 3rd Line Risk Oversight CRO nd 2 Line Risk Coverage Financial Risk Operational Risk Risk Owners Business Units st 1 Line Risk Process Identify Assess Respond Monitor & Report Risk Oversight and Coverage Financial and Operational Risk Management The CRO oversees both financial and operational risks. These risks include (i) country credit risks in the core sovereign-lending business, (ii) market and counterparty risks, including liquidity risk, and (iii) operational risks relating to people, processes and systems. In addition, the CRO works closely with IFC, MIGA, and IDA’s Management, to review, measure, aggregate, and report on risks, and share best practices across the WBG. The CRO also helps enhance cooperation between the entities and facilitates knowledge sharing in the risk management function. IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2021 39 Management’s Discussion and Analysis Section IX: Risk Management The following three departments report directly to the CRO: Credit Risk Department • Identifies, measures, monitors, and manages country credit risk faced by IBRD. By agreement with the Board, the individual country credit risk ratings are not shared with the Board and are not made public. • Assesses loan portfolio risk, determines the adequacy of provisions for losses on loans and other exposures, and monitors borrowers that are vulnerable to crises in the near term. These reviews are taken into account in determining the overall country programs and lending operations, and they are included in the assessment of IBRD’s capital adequacy. • Reviews proposed new financial products for any implications for country credit risk. Market and Counterparty Risk • Responsible for market, liquidity, and counterparty credit risk oversight, Department assessment, and reporting. It does these in coordination with IBRD’s financial managers who are responsible for the day-to-day execution of trades for the liquid asset and derivative portfolios, within applicable policy and guideline limits. • Ensure effective oversight, including: (i) maintaining sound credit assessments, (ii) addressing transaction and product risk issues, (iii) providing an independent review function, (iv) monitoring market and counterparty risk in the investment, borrowing and client operation portfolios, and (v) implementing the model risk governance framework. It also provides reports to the Audit Committee and the Board on the extent and nature of risks, risk management, and oversight. Operational Risk Department • Provides direction and oversight for operational risk activities by business function. • (i) Administers the Operational Risk Committee (ORC) for IBRD, (ii) implements the operational risk management framework which is aligned with Basel principles and provides direction to business unit partners to ensure consistent application, (iii) assists and guides business units in identifying and prioritizing significant operational risks and enabling monitoring and reporting of risks through suitable metrics (or risk indicators), (iv) helps identify emerging risks and trends through monitoring of internal and external risk events, (v) supports risk response and mitigating actions, and prepares a corporate Operational Risk Report for review and discussion by the ORC. • Responsible for business continuity management, enterprise risk management functions and corporate insurance. The risk of IBRD’s operations not meeting their development outcomes (development outcome risk) in IBRD’s lending activities is monitored at the corporate level by Operations Policy and Country Services (OPCS). Where fraud and corruption risks may impact IBRD-financed projects, OPCS, the regions and practice groups, and the Integrity Vice Presidency jointly address such issues. 40 IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2021 Management’s Discussion and Analysis Section IX: Risk Management Figure 19 depicts IBRD’s management risk committee structure for financial and operational risks. Figure 19: Risk Committee Structure for Financial and Operational Risks Financial Risk Operational Risk FRC ALCO ERC Finance and Risk Committee Asset and Liability Management Enterprise Risk Committee Committee Chair: MDCFO Chair: MDCFO Chair: MDCAO NBC ORC New Business Committee Operational Risk Committee Chair: CRO Financial Risk Committees: The Finance and Risk Committee (FRC), a Vice President level committee, provides a high-level governance structure for decisions that may have financial risks. The FRC was created under the authority of the Managing Director and WBG Chief Financial Officer (MDCFO) to approve, clear, or discuss: (a) risk policy and procedure documents related to financial integrity, income sustainability and balance sheet strength, and (b) issues and new business initiatives with policy implications related to IBRD’s financial risks, including country credit, market, counterparty, liquidity and model risks; and operational risks related to the finance business functions. The FRC helps to integrate individual components of finance and risk management activities by building on mechanisms and processes already in place and provides a forum for discussing and communicating significant risk related issues. The FRC meets regularly to discuss the financial performance, new products and services, and risk management of IBRD. New Business Committee (NBC) is a standing subcommittee of the FRC. The NBC provides advice, guidance and recommendations to the FRC, by performing due diligence over new financial products or services to ensure that Management has a full understanding of the rationale, costs, risks and rewards of the product or service being considered. Asset Liability Management Committee (ALCO), a Vice President-level committee chaired by the MDCFO provides a high-level forum to ensure prudent balance sheet management of IBRD by: a) monitoring its financial positions and Asset-Liability Management (ALM) activities for compliance with its respective guidelines, policies and procedures, including borrowing and investment activities; b) identifying and providing recommendations on emerging ALM issues for IBRD, as well as those related to capital, balance-sheet planning, and financial sustainability and c) serving as reviewing and recommending body for ongoing decisions as part of implementing the ALM policies and procedures of IBRD, including those that impact lending rates and net income. Operational Risk Committees: The Enterprise Risk Committee (ERC) is a corporate committee that has oversight over operational and non- financial risks across IBRD. Chaired by the Managing Director and Chief Administrative Officer (MDCAO), it consists of a Vice President level committee to review and discuss enterprise risk matters. Specifically, the Committee has a governance role over risk matters relating to corporate security, business continuity and IT security. Operational Risk Committee (ORC) is the main governance committee for operational risk and provides a mechanism for an integrated review and response across IBRD units on operational risks associated with people, processes, and systems, including business continuity, and recognizing that business units remain responsible for managing operational risks. The Committee’s key responsibilities include monitoring significant operational risk matters and events on a quarterly basis to ensure that appropriate risk-response measures are taken and reviewing and concluding on IBRD’s overall operational risk profile. The ORC is chaired by the CRO and escalates significant risks/decisions to the FRC and ERC. IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2021 41 Management’s Discussion and Analysis Section IX: Risk Management Box 6: Summary of IBRD's Specific Risk Categories Types of Risk How the Risk is Managed Credit Risk Country Credit Risk IBRD’s credit-risk-bearing capacity and individual country exposure limits Counterparty Credit Risk Counterparty credit limits and collateral Market Risk Interest Rate Risk Interest rate derivatives to match the sensitivity of assets and liabilities Exchange Rate Risk Currency derivatives to match the currency composition of assets and liabilities Liquidity Risk Prudential minimum liquidity level Operational Risk Risk assessment and monitoring of key risk indicators and internal and external operational risk events Management of IBRD’s Risks IBRD assumes financial risks to achieve its development and strategic objectives. IBRD’s financial risk management framework is designed to enable and support the institution in achieving its goals in a financially sustainable manner. IBRD manages credit, market and operational risks for its financial activities which include lending, borrowing and investing (Box 6). The primary financial risk to IBRD is the country credit risk inherent in its loan portfolio. IBRD is also exposed to risks in its liquid asset and derivative portfolios, where the major risks are interest rate, exchange rate, commercial counterparty, and liquidity risks. IBRD’s operational risk management framework is based upon a structured and uniform approach to identify, assess and monitor key operational risks across business units. Coronavirus Disease 2019 (COVID-19) Outbreak The 2019 outbreak of COVID-19 resulted in governments worldwide enacting emergency measures to combat the spread of the virus. These measures, which include the implementation of travel bans, quarantine periods and social distancing, have caused material disruption to businesses globally, resulting in an initial economic slowdown. Governments and central banks reacted with significant monetary and fiscal interventions designed to stabilize economic conditions. In light of COVID-19, IBRD faces additional credit, market and operational risks for its activities. IBRD continues to monitor developments and to manage the risks associated with all its portfolios. As of June 30, 2021, IBRD had sufficient resources to meet its liquidity requirements and continues to have access to the capital markets, despite market volatility. The liquid asset portfolio was 122% of the Target Liquidity Level. In FY21, IBRD continued to maintain a robust liquidity position and flexibility to access the necessary liquidity resources. Management remains vigilant in assessing funding needs in the medium and longer-term to manage the effect of possible severe market movements. IBRD’s capital adequacy, as indicated by Equity-to-Loans ratio, remains stable, despite increased market volatility since the COVID-19 outbreak (Figure 20). As of the reporting date, country credit risk and counterparty credit risk remain in line with the existing governance framework and established credit limits. The loan loss provisions reflect IBRD’s current assessment of country risk ratings. The fair values of related financial instruments reflect counterparty credit risk in IBRD’s portfolios. Developments in the market continue to be closely monitored and managed. Home-based work continues in many IBRD offices throughout the world, in line with IBRD’s Business Continuity Procedure. In addition, IBRD has adopted other prudent measures to ensure the health and safety of its employees, including imposing travel restrictions and holding public events in virtual format. 42 IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2021 Management’s Discussion and Analysis Section IX: Risk Management While the duration of the COVID-19 pandemic and its effects remain difficult to predict at this time, IBRD has continued to respond to demand and operate its core business functions effectively by utilizing technology for remote work, and by leveraging extensive local presence in client countries around the world. Management has an office reopening framework that prioritizes staff health and safety while taking into consideration risks including business continuity. The office reopening framework provides for the incremental return to office and on-site business activities in stages or “tiers,” allowing for enough time in between tiers to assess risk and preparedness indicators. IBRD continues to monitor risks associated with COVID-19 and maintain plans to respond as the situation evolves. While our offices around the world are in different operating statuses based on local conditions, IBRD has started the process for a gradual reopening of offices for certain locations, including its headquarters in Washington D.C. Capital Adequacy IBRD holds capital to cover the credit, market and operational risks inherent in its operating activities and financial assets. Country credit risk is the most substantive risk covered by IBRD’s equity. The Board monitors IBRD’s capital adequacy within a Strategic Capital Adequacy Framework, using the equity-to- loans ratio as a key indicator of IBRD’s capital adequacy. The framework seeks to ensure that IBRD’s capital is aligned with the financial risk associated with its loan portfolio as well as other exposures over a medium-term capital- planning horizon. Under this framework, IBRD evaluates its capital adequacy as measured by stress tests and an appropriate minimum level for the long-term equity-to-loans ratio. For FY21, the outcome of the stress tests was satisfactory. Figure 20: Equity-to-Loans Ratio 26% 23% 20% policy minimum 17% Jun-17 Jun-18 Jun-19 Jun-20 Jun-21 IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2021 43 Management’s Discussion and Analysis Section IX: Risk Management Table 29: Equity-to-Loans Ratio In millions of U.S. dollars Variance Due to Due to Activities Translation As of June 30, 2021 2020 Total Adjustment Usable paid-in capital $ 18,583 $ 17,288 $ 1,295 $ 1,216 $ 79 Special reserve 293 293 - - - General reserve a 31,464 30,387 1,077 1,077 - Cumulative translation adjustment b (268) (737) 469 - 469 Other adjustments (75) (93) 18 - 18 Equity (usable equity) $ 49,997 $ 47,138 $ 2,859 $ 2,293 $ 566 Loans exposure $ 220,564 $ 204,231 $ 16,333 $ 13,591 $ 2,742 Present value of guarantees 3,079 3,264 (185) (285) 100 Effective but undisbursed DDOs - 1,834 (1,834) (1,834) - Relevant accumulated provisions c (1,630) (1,669) 39 56 (17) Deferred loan income (495) (474) (21) (15) (6) Other exposures (723) (727) 4 4 - Loans (total exposure) $ 220,795 $ 206,459 $ 14,336 $ 11,517 $ 2,819 Equity-to-Loans Ratio 22.6% 22.8% a. Includes transfer to the General Reserve, which for FY21 (FY20) was approved by the Board on August [5], 2021 (August 7, 2020). FY21 General Reserve also includes a one-time transfer of $203 million from Other reserves to the General reserve, which represents the cumulative effect of adopting ASU 2016-13 (CECL) on July 1, 2020. b. Excludes cumulative translation amounts associated with the unrealized mark-to-market gains/losses on non-trading portfolios, net. c. Includes the accumulated provision on signed loans commitments beginning July 1, 2020, upon the adoption the ASU 2016-13 (CECL). IBRD’s equity-to-loans ratio decreased slightly to 22.6% as of June 30, 2021, compared with 22.8% as of June 30, 2020, and remained above the 20% minimum threshold level (Table 29). The slight decline was due to the increase of approximately $11.5 billion in total exposure, offset by the receipt of $1.2 billion of capital subscription payments and the retention of $0.9 billion in the General Reserve out of FY21 allocable income. Under IBRD’s currency management policy, to minimize exchange rate risk in a multicurrency business, IBRD matches its borrowing obligations in any one currency (after derivatives activities) with assets in the same currency. In addition, IBRD’s policy is to minimize the exchange rate sensitivity of its capital adequacy as measured by the equity-to-loans ratio. It implements this policy by periodically undertaking currency conversions to align the currency composition of its equity with that of its outstanding loans, across major currencies. Credit Risk IBRD faces two types of credit risk: country credit risk and counterparty credit risk. Country credit risk is the risk of loss due to a country not meeting its contractual obligations, and counterparty credit risk is the risk of loss attributable to a counterparty not honoring its contractual obligations. IBRD is exposed to commercial as well as non-commercial counterparty credit risk. Country Credit Risk IBRD’s mandate is to take only sovereign credit risk in its lending activities. Within country credit risk, three distinct types of risks can be identified: idiosyncratic risk, correlation risk, and concentration risk. Idiosyncratic risk is the risk of an individual borrowing country’s exposure falling into nonaccrual status for country-specific reasons (such as policy slippage or political instability). Correlation risk is the risk that exposure to two or more borrowing countries will fall into nonaccrual in response to common global or regional economic, political, or financial developments. Concentration risk is the risk resulting from having a large portion of exposure outstanding which, if the exposure fell into nonaccrual, would result in IBRD’s financial health being excessively impaired. Concentration risk needs to be evaluated both on a stand-alone basis (exposure of one borrowing country) and when taking into account correlation when more than one borrowing country is affected by a common event, such that when combined, IBRD’s exposure to a common risk is elevated. 44 IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2021 Management’s Discussion and Analysis Section IX: Risk Management To estimate idiosyncratic risk and stand-alone concentration risk, the Credit Risk Department looks at IBRD’s exposure to each borrowing country and each borrowing country’s expected default to IBRD as captured in its credit rating. Credit ratings and default probabilities reflect country economic, financial and political circumstances, and also consider Environmental, Social and Governance (ESG) risk factors. For correlation risk, the Credit Risk Department models the potential common factors that could impact borrowing countries simultaneously. The existence of correlation increases the likelihood of large nonaccrual events, as most of these nonaccrual events involve the joint default of two or more obligors in the portfolio. IBRD manages country credit risk by using individual country exposure limits and takes into account factors such as population size and the economic situation of the country. In addition, IBRD conducts stress tests of the effects of changes in market variables and of potential geopolitical events on its portfolio to complement its capital adequacy framework. Portfolio Concentration Risk Portfolio concentration risk, which arises when a small group of borrowing countries account for a large share of loans outstanding, is a key concern for IBRD. It is carefully managed for each borrowing country, in part, through an exposure limit for the aggregate balance of loans outstanding, the present value of guarantees, and the undisbursed portion of Deferred Drawdown Options (DDOs) that have become effective, among other potential exposures. Under current guidelines, IBRD’s exposure to a single borrowing country is restricted to the lower of an Equitable Access Limit (EAL) or the Single Borrower Limit (SBL). Equitable Access Limit The EAL is equal to 10% of IBRD’s Statutory Lending Limit (SLL). Under IBRD’s Articles, as applied, total loans outstanding, including participations in loans and callable guarantees, may not exceed the sum of unimpaired subscribed capital, reserves and surplus, referred to as the SLL. The SLL seeks to ensure that sufficient resources are available to meet IBRD's obligations to bondholders in the highly unlikely event of substantial and historically unprecedented losses on IBRD's loans. At June 30, 2021, the SLL totaled $328.6 billion, of which the outstanding loans and callable guarantees totaled $223.6 billion, or 68.1% of the SLL. The EAL was $32.9 billion, as of June 30, 2021. Single Borrower Limit The SBL amount is established, in part, by assessing its impact on overall portfolio risk relative to equity. The SBL caps the maximum exposure to IBRD’s most creditworthy and largest borrowing countries in terms of population and economic size. The SBL framework reflects a dual-SBL system, with the SBL for countries above the Graduation Discussion Income (GDI) threshold set lower than the SBL for countries below GDI. GDI is the level of GNI per capita of a member country above which graduation from IBRD starts being discussed. The GDI threshold was $7,065 as of July 1, 2020. Under the dual-SBL system, the SBL for FY21 was $23.5 billion for highly creditworthy countries below the GDI and $20.5 billion for highly creditworthy countries above the GDI. On August 5, 2021, the Board approved FY22 SBL limits of $24.9 billion and $21.2 billion, respectively. The SBL framework also contains a 50- basis point surcharge (SBL surcharge) payable on the incremental exposure in excess of the SBL surcharge threshold (defined as $2.5 billion below the SBL for the respective GDI group). In the event that a borrowing country eligible for one of the limits set under the SBL framework is downgraded to the high-risk category, management may determine that the borrowing country continue to be eligible for borrowing at the currently applicable limit, but the borrowing country would not be eligible for any future increases in the SBL approved by the Board. During FY21, there were 2 countries below-GDI and 2 countries above-GDI, which have their exposure limits set at the applicable SBLs. For all other countries, the individual country exposure limits were set below the relevant SBL. In the context of IBRD’s overall response to the impact of the COVID 19 crisis, on June 17, 2021, the Board approved temporary relief from the SBL surcharge by excluding all financings approved between May 20, 2021 and the end of FY22 for purposes of calculating whether a country’s exposure exceeds the SBL surcharge threshold. Operations excluded from the SBL surcharge calculation will continue to count towards SBL compliance. As of June 30, 2021, the ten countries with the highest exposures accounted for about 61% of IBRD’s total exposure (Figure 21: Country Exposures as of June 30, 2021). IBRD’s largest exposure to a single borrowing country was $17.7 billion on June 30, 2021. Monitoring these exposures relative to the limit, however, requires consideration of the repayment profiles of existing loans, as well as disbursement profiles and projected new loans and guarantees. IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2021 45 Management’s Discussion and Analysis Section IX: Risk Management Sustainable Annual Lending Limit (SALL) The “Financial Sustainability Framework” (FSF) requires IBRD to align its annual lending levels to its long-term sustainable capacity, while retaining flexibility to respond to crises by maintaining a crisis buffer. The SALL is the maximum annual commitment level sustainable, in real terms, for 10 years in line with IBRD’s capital adequacy framework and the Statutory Lending Limit set out in IBRD’s Articles, as determined by management. Under the FSF, the Board annually approves a crisis buffer. The crisis buffer-adjusted sustainable annual lending limit (SALL-Adj) serves as the upper bound for regular lending in the next year. For the fiscal year ending June 30, 2021, the Board had approved a crisis buffer of $10 billion and a SALL-Adj of $25 billion. On June 24, 2021, the Board approved a crisis buffer of $5 billion for FY22 (plus carryover from underutilization of the FY21 crisis buffer), resulting in a SALL-Adj of $28 billion for FY22. Based on the final outcome for FY21 resulting in a carryover of $4.5 billion from the FY21 crisis buffer, the applicable FY22 lending ceiling is $37.5 billion. Figure 21: Country Exposures as of June 30, 2021 In billions of U.S. dollars Top Ten Country Exposures India 17.7 Indonesia 17.5 Mexico 15.7 China 15.6 Brazil 15.3 Colombia 13.3 Egypt 11.6 Turkey 11.3 Philippines 9.1 Argentina 8.3 0 2 4 6 8 10 12 14 16 18 20 Credit-Risk-Bearing Capacity Management uses risk models to estimate the size of a potential nonaccrual shock that IBRD could face over the next three years at a given confidence level. The model-estimated nonaccrual shock is a single measure of the credit quality of the portfolio that combines the following: • IBRD’s country-credit-risk ratings and their associated expected risk of default; • Covariance risks; • The loan portfolio’s distribution across risk rating categories; and • The exposure concentration. The shock estimated by this risk model is used in IBRD’s capital adequacy testing to determine the impact of potential nonaccrual events on equity and income earning capacity. Expected Losses, Overdue Payments, and Non-Performing Loans The loan loss provision is calculated by taking into account IBRD’s total estimated exposure, the Expected Default Frequency (EDF), i.e. probability of default, and the assumed loss in the event of default. Expected losses inherent in the loan portfolio attributable to country credit risk are covered by the accumulated provision for losses on loans and other exposures, while unexpected losses owing to country credit risk are covered by equity (see Notes to the Financial Statements, Note A: Summary of Significant Accounting and Related Policies and Note D: Loans and Other Exposures). When a borrower fails to make payments due to IBRD on any principal, interest, or other charges, IBRD may suspend disbursements immediately on all loans to that borrower. IBRD’s current practice is to exercise this option using a graduated approach (Box 7). These practices also apply to member countries eligible to borrow from both IBRD and IDA, and whose payments on IDA loans may become overdue. It is IBRD’s practice not to reschedule interest or principal payments on its loans or participate in debt rescheduling agreements with respect to its loans. As of June 30, 2021, there were no principal or interest amounts on loans in accrual status, that were overdue by more than three months. 46 IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2021 Management’s Discussion and Analysis Section IX: Risk Management As of June 30, 2021, 0.2% of IBRD’s loans were in nonaccrual status and all related to Zimbabwe. The exposure to Zimbabwe was $432 million as of June 30, 2021, compared with $433 million as of June 30, 2020. IBRD received a payment of $1.5 million from Zimbabwe in FY21 (FY20: $1.5 million). Box 7: Treatment of Overdue Payments Where the borrower is the member country, no new loans to the member country, or to any other borrower in the country, will be presented to the Board for approval, nor will any previously approved loan be signed, until payments for all amounts 30 days overdue or longer have been received. Where the borrower is not the member country, no new loans to that borrower will be signed or approved. In either case, the borrower will lose its eligibility for any Overdue by waiver of interest charges in effect at that time for loans signed before May 16, 2007, and those loans signed 30 days between May 16, 2007, and September 27, 2007, if the borrowers elected not to convert the terms of their loans to the pricing terms effective September 27, 2007. For loans with the pricing terms applicable from May 16, 2007, an overdue interest penalty will be charged at a rate of 50 basis points on the overdue principal. In addition, if an overdue amount remains unpaid for a period of 30 days, then the borrower will pay a higher interest rate (LIBOR + fixed spread) plus 50 basis points on the overdue principal amount until the overdue amount is fully paid. In addition to the provisions cited above for payments overdue by 30 days, to avoid proceeding further on the notification process leading to suspension of disbursements, the country as borrower or guarantor and all Overdue by borrowers in the country must pay not only all payments overdue by 30 days or more, but also all payments due 45 days regardless of the number of days since they have fallen due. Where the borrower is not the member country, no new loans to, or guaranteed by, the member country, will be signed or approved. Additionally, all borrowers in the country will lose eligibility for any waivers of interest in effect at the time. In addition to the suspension of approval for new loans and signing of previously approved loans, disbursements Overdue by on all loans to, or guaranteed by, the member country are suspended until all overdue amounts are paid. This 60 days policy applies even when the borrower is not the member country. Under exceptional circumstances, disbursements can be made to a member country upon the Board’s approval. All loans made to, or guaranteed by, a member of IBRD are placed in nonaccrual status, unless IBRD determines that the overdue amount will be collected in the immediate future. Unpaid interest and other charges not yet paid Overdue by on loans outstanding are deducted from the income for the current period. To the extent that these payments are more than received, they are included in income. At the time of arrears clearance, if collectability risk is considered to be six months particularly high, the member’s exposures may not automatically emerge from nonaccrual status. In such instances, a decision is made on the restoration of accrual status on a case-by-case basis; in certain cases, this decision may be deferred until after a suitable period of payment performance has passed. Counterparty Credit Risk IBRD is exposed to commercial and non-commercial counterparty credit risk. Commercial Counterparty Credit Risk This is the risk that counterparties fail to meet their payment obligations under the terms of the contract or other financial instruments. Effective management of counterparty credit risk is vital to the success of IBRD’s funding, investment, and asset/liability management activities. The monitoring and management of these risks is continuous as the market environment evolves. IBRD mitigates the counterparty credit risk from its investment and derivative holdings through the credit approval process, the use of collateral agreements and risk limits, and other monitoring procedures. The credit approval process involves evaluating counterparty and product-specific creditworthiness, assigning internal credit ratings and limits, and determining the risk profile of specific transactions. Credit limits are set and monitored throughout the year. Counterparty exposure is updated daily, considering the current market values of assets held, estimates of potential future movements of exposure for derivative instruments, and related counterparty collateral agreements, where collateral posting requirements are based on thresholds driven by public credit ratings. Collateral held includes cash and highly rated liquid investment securities. Commercial credit risk management includes ESG related assessments in the approval and monitoring of higher exposure counterparties for the liquid asset portfolio and for derivative counterparties. In addition, third-party ESG scores of the liquid asset portfolio and derivative exposures are monitored. IBRD’s liquid asset investment portfolio consists mostly of sovereign government bonds, debt instruments issued by sovereign government agencies, and bank time deposits. More than half of these investments are with issuers and counterparties rated triple-A and AA (Table 30). IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2021 47 Management’s Discussion and Analysis Section IX: Risk Management Derivative Instruments In the normal course of its business, IBRD enters into various derivative instruments to manage foreign exchange and interest rate risks. These derivatives are used mainly to meet the financial needs of IBRD borrowers and to manage the institution’s exposure to fluctuations in interest and exchange rates. These transactions are conducted with other financial institutions and, by their nature, entail commercial counterparty credit risk. While the volume of derivative activity can be measured by the contracted notional value of derivatives, notional value is not an accurate measure of credit or market risk. IBRD uses the estimated replacement cost of the derivative instrument, or potential future exposure to measure counterparty credit risk with these trading partners. Under IBRD’s collateral arrangements, IBRD receives collateral when mark-to-market exposure is greater than the ratings based collateral threshold. As of June 30, 2021, IBRD had received collateral of cash and securities totaling $4.4 billion. IBRD is not required to post collateral under its derivative agreements as long as it maintains a triple-A credit rating. (For the contractual value, notional amounts, related credit risk exposure amounts, and the amount IBRD would be required to post in the event of a downgrade, see Notes to Financial Statements, Note F: Derivative Instruments). Investment Securities The Board-approved General Investment Authorization provides the basic authority for IBRD to invest its liquid assets. Furthermore, all investment activities are conducted in accordance with a more detailed set of Investment Guidelines. The Investment Guidelines are approved by the MDCFO and implemented by the Treasurer. These Investment Guidelines set out detailed trading and operational rules, including which instruments are eligible for investment, and establish risk parameters relative to benchmarks. These include an overall consultative loss limit and duration deviation, specifying concentration limits on counterparties and instrument classes, as well as clear lines of responsibility for risk monitoring and compliance. Credit risk is controlled by applying eligibility criteria (Box 8). The overall market risk of the investment portfolio is subject to a consultative loss limit to reflect a level of tolerance for the risk of underperforming the benchmark in any fiscal year. IBRD has procedures in place to monitor performance against this limit and potential risks, and it takes appropriate actions if the limit is reached. All investments are subject to additional conditions specified by the Chief Risk Officer, as deemed necessary. IBRD’s exposure to futures and options and resale agreements is marginal. For futures and options, IBRD generally closes out open positions prior to expiration. Futures are settled on a daily basis. In addition, IBRD monitors the fair value of resale securities received and, if necessary, closes out transactions and enters into new repriced transactions. Management has broadened its universe of investment assets in an effort to achieve greater diversification in the portfolio and better risk-adjusted investment performance. This exposure is monitored by the Market and Counterparty Risk Department. 48 IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2021 Management’s Discussion and Analysis Section IX: Risk Management Box 8: Eligibility Criteria for IBRD's Investments a Instrument Securities Description IBRD may only invest in obligations issued or unconditionally guaranteed by governments Sovereigns of member countries with a minimum credit rating of AA-. However, no rating is required if government obligations are denominated in the national currency of the issuer. IBRD may invest only in obligations issued by an agency or instrumentality of a government Agencies of a member country, a multilateral organization, or any other official entity (other than the government of a member country), with a minimum credit rating of AA-. Corporates and asset-backed IBRD may only invest in securities with a triple-A credit rating. securities IBRD may only invest in time deposits issued or guaranteed by financial institutions, whose Time deposits b senior debt securities are rated at least A-. IBRD may only invest in short-term borrowings (less than 190 days) from commercial banks, Commercial Paper corporates, and financial institutions with at least two Prime-1 ratings. Securities lending, and borrowing, IBRD may engage in securities lending against adequate collateral, repurchases and repurchases, resales, and reverse reverse repurchases, against adequate margin protection, of the securities described under repurchases the sovereigns, agencies, and corporates and asset-backed security categories. IBRD may engage in collateralized forward transactions, such as swap, repurchase, resale, securities lending, or equivalent transactions that involve certain underlying assets not Collateral Assets independently eligible for investment. In each case, adequate margin protection needs to be received. a. All investments are subject to approval by the Market and Counterparty Risk Department and must appear on the “Approved List” created by the department. b. Time deposits include certificates of deposit, bankers’ acceptances, and other obligations issued or unconditionally guaranteed by banks or other financial institutions. Commercial Counterparty Credit Risk Exposure As a result of IBRD’s use of collateral arrangements for swap transactions, its residual commercial counterparty credit risk is concentrated in the investment portfolio, in instruments issued by sovereign governments and non-sovereign holdings (including agencies, asset-backed securities) (Table 30). Table 30: Commercial Credit Exposure, Net of Collateral Held, by Counterparty Rating In millions of U.S. dollars As of June 30, 2021 Investments Net Swap Total % of Counterparty Rating a Sovereigns Non-Sovereigns Exposure Exposure Total AAA $ 25,186 $ 10,136 $ - $ 35,322 41% AA 2,828 23,525 628 26,981 31 A 12,188 11,999 191 24,378 28 BBB - 56 - 56 * BB or lower/unrated 40 8 - 48 * Total $ 40,242 $ 45,724 $ 819 $ 86,785 100% As of June 30, 2020 Investments Net Swap Total % of Counterparty Rating a Sovereigns Non-Sovereigns Exposure Exposure Total AAA $ 22,620 $ 14,069 $ - $ 36,689 44% AA 2,109 23,226 683 26,018 31 A 11,128 9,245 215 20,588 25 BBB 1 38 - 39 * BB or lower/unrated 41 5 - 46 * Total $ 35,899 $ 46,583 $ 898 $ 83,380 100% a. Average rating is calculated using available ratings from the three major rating agencies; however, if ratings are not available from each of the three rating agencies. IBRD uses the average of the ratings available from any of such rating agencies or a single rating to the extent that an instrument or issuer (as applicable) is rated by only one rating agency. * Indicates amount less than $0.5 million or percentage less than 0.5%. IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2021 49 Management’s Discussion and Analysis Section IX: Risk Management IBRD’s overall commercial counterparty credit exposure, net of collateral held, was $86.8 billion as of June 30, 2021. As shown on Table 30, the credit quality of IBRD’s portfolio remains concentrated in the upper end of the credit spectrum, with 72% of the portfolio rated AA or above and the remaining portfolio primarily rated A. The A rated counterparties primarily consisted of sovereigns and financial institutions (limited to short-term deposits and swaps). Non-Commercial Counterparty Credit Risk In addition to its derivative transactions with commercial counterparties, IBRD offers derivative-intermediation and other services to borrowing member countries, as well as to affiliated and non-affiliated organizations, to help meet their development needs or to carry out their development mandates: • Borrowing Member Countries: Currency and interest rate swap transactions are executed between IBRD and its borrowers under master derivative agreements. As of June 30, 2021, the notional amounts and net fair value exposures under these agreements were $10.6 billion and $1.2 billion, respectively. Expected losses inherent in these exposures due to country credit risk are incorporated in the fair value of these instruments. • Affiliated Organizations: Derivative contracts are executed between IBRD and IDA, under an agreement allowing IBRD to intermediate derivative contracts on behalf of IDA. As of June 30, 2021, the notional amount under this agreement was $0.8 billion. As of June 30, 2021, IBRD had exposure of $8 million to IDA. Under its derivative agreement with IBRD, IDA is not required to post collateral as long as it maintains liquidity holdings at pre-determined levels. As of June 30, 2021, IDA was not required to post any collateral with IBRD. • Non-Affiliated Organizations: IBRD has a master derivatives agreement with IFFIm, under which several transactions have been executed. As of June 30, 2021, the notional amounts and net fair value exposures under this agreement were $3.8 billion and $0.3 billion, respectively. IBRD has the right to call for collateral above an agreed specified threshold. As of June 30, 2021, IBRD had not exercised this right, but it reserves the right under the existing terms of the agreement. Rather than calling for collateral, IBRD and IFFIm have agreed to manage IBRD’s exposure by applying a risk management buffer to the gearing ratio limit. The gearing ratio limit represents the maximum amount of net financial obligations of IFFIm less cash and liquid assets, as a percent of the net present value of IFFIm's financial assets. Credit and Debit Valuation Adjustments Most outstanding derivative positions are transacted over the counter and therefore valued using internally developed valuation models. For commercial and non-commercial counterparties where IBRD has a net exposure (net receivable position), IBRD calculates a Credit Valuation Adjustment (CVA) to reflect credit risk. For net derivative positions with commercial and non-commercial counterparties where IBRD is in a net payable position, IBRD calculates a Debit Valuation Adjustment (DVA) to reflect its own credit risk. The CVA is calculated using the fair value of the derivative contracts, net of collateral received under credit support agreements, and the probability of counterparty default based on the Credit Default Swaps (CDS) spread and, where applicable, proxy CDS spreads. IBRD does not currently hedge this exposure. The DVA calculation is generally consistent with the CVA methodology and incorporates IBRD’s own credit spread as observed through the CDS market. As of June 30, 2021, IBRD recorded a CVA on its Balance Sheet of $18 million, and a DVA of $21 million. Effect of Changes in Credit Spreads The sensitivity of IBRD’s portfolios to changes in credit spreads is shown in Table 31, where the amount represents the dollar change in fair value which corresponds to a one basis point parallel upward shift in credit spreads. • Investments: IBRD purchases investment-grade securities for its liquid asset portfolio. Credit risk is controlled through appropriate eligibility criteria (see Box 8). The overall risk of the investment portfolio is also constrained by a consultative loss limit. In line with these risk management strategies, the potential effect of default risk on IBRD’s investment portfolio is therefore small. The effect of credit changes on the market value of the investment portfolio is also relatively limited; a one-basis-point change in the credit spreads of the investment assets would have an estimated impact of $3 million on the market value of the portfolio. • Borrowings: IBRD had $1,377 million of unrealized mark-to-market losses due to the change in own credit relative to LIBOR in FY21. As shown in Table 31, the dollar value change corresponding to a one basis-point upward parallel shift in credit spreads (IBRD’s own credit relative to LIBOR) is $115 million of unrealized mark-to-market gains. 50 IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2021 Management’s Discussion and Analysis Section IX: Risk Management • Loans. IBRD’s fair value model represents a hypothetical exit price of the loan portfolio. It incorporates CDS spreads as an indicator of the credit risk for each borrower, after adjusting recovery levels to incorporate IBRD’s institutional experience and assumptions. These assumptions are reviewed annually. The dollar value change corresponding to a one-basis-point parallel rise in CDS rates on the loan portfolio is $2 million of unrealized mark-to-market losses. IBRD does not hedge its sovereign credit exposure but Management assesses its credit risk through a proprietary loan-loss provisioning model. Loan-loss provision represents the expected losses inherent in its accrual and nonaccrual portfolios. As discussed earlier, IBRD’s country credit risk is managed by using individual country exposure limits and by monitoring its credit-risk-bearing capacity. • Derivatives. IBRD uses derivatives to manage exposures to currency and interest rate risks in its investment, loan, other ALM and borrowing portfolios. It is therefore exposed to commercial counterparty credit risk on these instruments. This risk is managed through: o Stringent selection of commercial derivative counterparties, o Daily marking-to-market of derivative positions, and o Use of collateral and collateral thresholds for all commercial counterparties. Table 31: Effect of Credit on IBRD’s Portfolios In millions of U.S. dollars As of June 30, 2021 Credit Effect on Portfolio Sensitivity a Borrowing portfolio $ 115 Loan portfolio b (2) Other ALM portfolio (*) Investment portfolio (3) Total gains $ 110 a. Excludes CVA and DVA on derivatives. b. If loans were measured at fair value. * Sensitivity is marginal. Market Risk IBRD is exposed to changes in interest and exchange rates, and it uses various strategies to minimize its exposure to market risk. Interest Rate Risk Under its current interest rate risk management strategy, IBRD seeks to match the interest rate sensitivity of its assets (loan and investment trading portfolios) with those of its liabilities (borrowing portfolio) by using derivatives, such as interest rate swaps. These derivatives effectively convert IBRD’s financial assets and liabilities into variable-rate instruments. After considering the effects of these derivatives, virtually the entire loan and borrowing portfolios are carried at variable interest rates (Figures 23-24). On a fair value basis, if interest rates increase by one basis point, IBRD would experience an unrealized mark-to- market loss of $14 million as of June 30, 2021 (see Table 32). • Investment Trading Portfolio: After the effects of derivatives, the duration of the investment trading portfolio is less than three months. As a result, the portfolio has a low sensitivity to changes in interest rates, resulting in small fair value adjustments to income. • Loan and Borrowing Portfolios: In line with IBRD’s financial risk management strategies, the sensitivity of IBRD’s loan and borrowing portfolios to changes in interest rates is relatively small. As noted earlier, IBRD intends to maintain its positions for these portfolios and thus manages these instruments on a cash flow basis. The resulting net unrealized mark-to-market gains and losses on these portfolios, associated with the small sensitivity to interest rates, are therefore not expected to be realized. • Other ALM Portfolio: At the end of FY21, a one basis-point increase in interest rates would result in unrealized mark-to-market losses of $16 million on the other ALM portfolio (unrealized mark-to-market losses of $14 million at the end FY20). IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2021 51 Management’s Discussion and Analysis Section IX: Risk Management Table 32: Effect of Interest Rates on IBRD’s Portfolios In millions of U.S. dollars Interest Rate Effect on As of June 30, 2021 Portfolio Sensitivity a Borrowing portfolio $ 6 Loan portfolio b (3) Other ALM portfolio (16) Investment portfolio (1) Total losses $ (14) a. After the effects of derivatives. b. If loans were measured at fair value. Figure 22 provides a further breakdown of how the use of derivatives affects the overall sensitivity of the borrowing, loan, other ALM and investment portfolios. It illustrates the extent to which each portfolio is economically hedged. For example, for the borrowing portfolio, a one basis point increase in interest rates would result in net unrealized mark-to-market gains of $115 million on the bonds. These would be significantly offset by the $109 million of net unrealized mark-to-market losses on the related swaps, resulting in net unrealized mark-to-market gains of $6 million for the portfolio. Loan sensitivities are illustrative as loans are carried at amortized cost on the Balance Sheet. Figure 22: Sensitivity to Interest Rates Dollar change in fair value corresponding to a one-basis-point upward parallel shift in interest rates. In millions of U.S. dollars Borrowing Portfolio Loan Portfolio Other ALM Investment Portfolio Swaps Bonds 0 Loans Swaps Swaps Investments FY21 -109 115 FY21 -1.0 FY21 -38 35 -16 FY21 FY20 FY20 -1.0 FY20 -83 88 -48 31 -14 FY20 -120 -80 -40 0 40 80 120 -60-40-20 0 20 40 60 -20 -10 0 10 20 -20.0 -10.0 0.0 10.0 20.0 IBRD faces three main sources of interest rate risk: the interest rate sensitivity of the income earned in a low interest rate environment, fixed-spread loans refinancing risk, and interest rate risk on the liquid asset portfolio. The discontinuance of LIBOR and the transition to alternative reference rates also presents a significant risk to IBRD’s activities, which is discussed later in this section. Figure 23: Effect of Derivatives on Interest Rate Structure of the Borrowing Portfolio - June 30, 2021 In millions of U.S. dollars, except for ratios Borrowing Portfolio excluding Derivatives Borrowing Portfolio Including Derivatives Fixed Variable * 12% Variable Fixed 100% 88% a. Excludes discount notes. * Denotes percentage less than 0.5%. 52 IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2021 Management’s Discussion and Analysis Section IX: Risk Management Figure 24: Effect of Derivatives on Interest Rate Structure of the Loan Portfolio - June 30, 2021 In millions of U.S. dollars, except for ratios Loans Excluding Derivatives Loans Including Derivatives Fixed Fixed * 15% Variable Variable 85% 100% * Denotes percentage less than 0.5%. Alignment of Assets and Liabilities – IBRD borrows in multiple currency and interest rate bases worldwide and lends the proceeds of those borrowings to eligible member countries. IBRD offers its borrowers the option of converting the currency and interest rate bases on their loans where there is a liquid swap market, thereby enabling them to select loan terms that are best suited to their circumstances. Such options meet borrowers’ preferences and help mitigate their currency and interest rate risk. In the absence of active risk management, IBRD would be exposed to substantial market risk and asset-liability management imbalances. To address such imbalances, IBRD uses derivatives to swap its payment obligations on bonds to a currency and interest rate basis that is aligned with its loan portfolio. Likewise, when a borrower exercises a conversion option on a loan to change its currency or interest rate basis, IBRD uses derivatives to convert its exposure back to a currency and interest rate basis, that is aligned with its loan portfolio. Thus, IBRD’s payment obligations on its borrowings are aligned with its loans funded by such borrowings – generally, after the effect of derivatives, IBRD primarily pays U.S. dollar, short-term variable rates on its borrowings, and receives U.S. dollar, short-term variable rates on its loans. Figure 25 below illustrates the use of derivatives in the loan and borrowing portfolios: Figure 25: Use of Derivatives for Loans and Borrowings Market Debt After Derivatives Loans Currency In multiple Currency Swaps currencies of Swaps borrowers’ Non US In US dollars and Currencies euros (reflecting preference borrowers’ In multiple preferences) interest rate bases or fixed LIBOR-based In multiple coupon rate floating rate interest rate Interest Rate Interest Rate bases or fixed Swaps Swaps coupon rate Derivatives are also used to manage market risk in the liquidity portfolio. In line with its development mandate, IBRD maintains a large liquidity balance to ensure that it can make payments on its borrowing obligations and loan disbursements, even in the event of severe market disruptions. Pending disbursement, the liquidity portfolio is invested on a global basis in multiple currencies and interest rates. Derivatives are also used to align the currency and duration of investments with the debt funding the liquidity portfolio. Figure 26 below illustrates the use of derivatives in the liquidity portfolio: Figure 26: Use of Derivatives for Investments IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2021 53 Management’s Discussion and Analysis Section IX: Risk Management Other ALM – Given most loans carry variable rates, for the portion of loans that are funded by equity, loan interest revenue, if left unmanaged, would be highly sensitive to fluctuations in short-term interest rates. The equity-to-loans ratio of 22.6% indicates the portion of loans funded by equity. To manage this exposure, Management has put in place a framework with the primary goal of stabilizing this revenue. Under this framework, IBRD uses derivatives to convert the variable rate cash flows on loans funded by equity back to fixed rate cash flows, thereby stabilizing loan interest revenue over time. See Figure 27 below. Figure 27: Use of Derivatives for Other ALM Low Interest Rate Environment Loans to borrowing countries: Under IBRD’s loan agreements, interest is required to be paid by borrowers to IBRD, and not vice versa; if an interest rate formula yields a negative rate, the interest rate is fixed at zero. Liquid Asset Portfolio: IBRD’s existing guidelines allow for the investment in a wide variety of credit products in both developed and emerging market economies (see investment eligibility criteria in Box 8). Low and negative fixed interest rates present a challenge for the investment of the liquid asset portfolio. However, even markets with negative rates can provide positive spread returns once the investment is swapped back into a U.S. dollar floating basis. In FY21, despite the low interest rate environment, IBRD was able to generate a positive return, net of funding costs on its liquid asset portfolio (see Table 1). The interest rate risk on IBRD’s liquid asset portfolio, including the risk that the value of assets in the portfolio will fluctuate in response to changes in market interest rates, is managed within specified duration-mismatch limits. The liquid asset portfolio has spread exposure because IBRD holds instruments other than the short-term bank deposits represented by the portfolios’ London Interbank Bid Rate (LIBID) benchmark. These investments generally yield positive returns over the benchmark but can generate mark-to-market losses if their spreads relative to LIBOR widen. Fixed Spread Loan Refinancing Risk Refinancing risk for funding fixed-spread loans relates to the potential impact of any future deterioration in IBRD's funding spread. IBRD does not match the maturity of its funding with that of its fixed spread loans as this would result in significantly higher financing costs for all loans. Instead, IBRD targets a shorter average funding maturity and manages the refinancing risk through two technical components of the fixed spread loans pricing, both of which can be changed at Management’s discretion (see Table 13): • Projected funding cost: Management’s best estimate of average funding costs over the life of the loan. • Risk premium: A charge for the risk that actual funding costs are higher than projected Liquid Asset Portfolio Spread Exposure. Other Interest Rate Risks Interest rate risk also arises from other variables, including differences in timing between the contractual maturities or re-pricing of IBRD’s assets, liabilities, and derivative instruments. On variable-rate assets and liabilities, IBRD is exposed to timing mismatches between the re-set dates on its variable-rate receivables and payables. IBRD monitors these exposures and may execute overlay interest rates swaps to reduce sizable timing mismatches. 54 IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2021 Management’s Discussion and Analysis Section IX: Risk Management Alternative Reference Rate In July 2017, the Financial Conduct Authority (FCA), the regulator of LIBOR, announced that it will no longer compel panel banks to submit rates required to calculate LIBOR after December 31, 2021 and, therefore, market participants, including IBRD and its borrowers need to move to alternative reference rates because the availability of LIBOR after this date is not a certainty. In March 2021, the FCA confirmed that all the LIBOR settings will either cease to be provided by any administrator or no longer be representative, as follows: • All sterling, euro, Swiss franc and Japanese yen LIBOR settings, and the 1-week and 2-month USD LIBOR settings, will cease immediately following publication on December 31, 2021. • All remaining USD LIBOR settings, including the 6-month USD LIBOR used as the reference rate for IBRD loans, will cease immediately following its publication on June 30, 2023. Despite the extension of the publication of certain USD LIBOR rates to June 30, 2023, the regulators’ guidance remains that LIBOR should not be used for new contracts after 2021. In consideration of the regulatory guidance and in preparations for the global markets’ transition away from LIBOR, IBRD has taken important steps to facilitate a smooth and orderly transition of its financial instruments effected by alternative reference rates. IBRD previously completed an initial impact assessment of its exposure, both quantitatively and qualitatively, to LIBOR and developed an implementation roadmap for the LIBOR transition. IBRD is actively working through this transition from multiple perspectives: lending, funding, accounting, operations, information technology, liquidity investing, risk and legal, considering the portfolio of existing loans and other instruments that use LIBOR as a benchmark. In FY20, the Board endorsed an omnibus amendment process with borrowers for loan agreements to address the replacement of LIBOR, allowing IBRD to maintain and preserve the pre-existing relationship between its funding costs and lending rates and maintain the principles of fairness and equivalence for any replaced reference rate. The contract amendments will enable similar treatment to all loans by bringing the fallback provisions related to changes in the reference rate in the General Conditions into conformity with the revised General Conditions of December 2018. The new language permits IBRD to transition the interest rate to alternative reference rates when a suitable alternative is available, and it is appropriate to do so. To date, IBRD has made significant progress in securing counter-signature of the omnibus amendments from borrowers. IBRD is also using pre-existing provisions in loan agreements to implement these changes. In addition, as the market undergoes fundamental changes due to the transition to alternative reference rates, as part of its interest rate risk management, on January 26, 2021, the Board approved a suspension of the offering of loans on fixed spread terms, as well as suspension of a related conversion feature from the variable spread terms to fixed spread terms, effective from April 1, 2021. An existing feature to permit fixing of the reference rate in loans with variable spread terms remains available. In July, 2021, the Board approved offering new loans with new alternative reference rates and ceasing to offer LIBOR based loans effective January 1, 2022; and the switch-over of existing loans beginning in January 2022 for all variable spread and non-USD fixed spread loans and beginning in July 2023 for the remaining USD fixed spread loans (see Table 14). Careful consideration was given to the regulatory guidance, relevant provisions in IBRD’s General Conditions and loan agreements, asset liability management (ALM) needs, as well as borrower implications. As a result of the different characteristics of the new market reference rates and LIBOR, and the implications of a staggered LIBOR cessation timetable, there will be changes to the current loan processes including billing and cost-pass through computation methodologies used for lending rates. IBRD will continue to work with key stakeholders, including internal subject matter experts, senior management, borrowers, industry groups and other market participants, to mitigate potential financial and operational risks to which IBRD is exposed and to ensure an orderly transition to the alternative reference rates. IBRD is managing the transition prudently and in a cost-effective manner. Exchange Rate Risk IBRD mainly holds its assets and liabilities in U.S. dollars and euro. However, the reported levels of its assets, liabilities, income, and expenses in the financial statements are affected by exchange rate movements in all the currencies in which IBRD transacts, relative to its reporting currency, the U.S. dollar. IBRD’s functional currencies are the U.S. dollar and euro. Currency translation adjustments relating to euro-denominated balances are reflected in other comprehensive income, a component of equity. Currency translation adjustments relating to non-euro denominated balances (non-functional currencies) are reported in the Statement of Income. While IBRD’s equity IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2021 55 Management’s Discussion and Analysis Section IX: Risk Management could be affected by exchange rate movements, IBRD’s risk management policies work to minimize the exchange rate risk in its capital adequacy, by immunizing the equity-to-loans ratio against exchange rate movements. To minimize exchange risk, IBRD matches its borrowing obligations in any one currency (after derivative activities) with assets in the same currency (Figure 28). In addition, IBRD undertakes periodic currency conversions to align the currency composition of its equity with that of its outstanding loans across major currencies. Together, these policies are designed to minimize the impact of exchange rate fluctuations on the equity-to-loans ratio; thereby preserving IBRD’s ability to better absorb unexpected losses from arrears on loan repayments, regardless of exchange movements. As a result, exchange rate movements during the year generally do not have an impact on the overall equity-to-loans ratio. Figure 28: Currency Composition of Loan and Borrowing Portfolios as of June 30, 2021 Loans outstanding (including Derivatives) Borrowings funding loans (including Derivatives) Euro Euro Others 19% Others 1% 18% 1% U.S. Dollars U.S. Dollars 80% 81% Liquidity Risk Liquidity risk arises in the general funding of IBRD’s activities and in managing its financial position. It includes the risk of IBRD being unable to fund its portfolio of assets at appropriate maturities and rates, and the risk of being unable to liquidate a position in a timely manner at a reasonable price. Under IBRD’s liquidity management guidelines, aggregate liquid asset holdings are kept at or above a specified Prudential Minimum to safeguard against cash flow interruptions. The Target Liquidity Level represents twelve-months’ coverage as calculated at the start of every fiscal year. The Prudential Minimum is defined as 80% of the Target Liquidity Level. The 150% maximum guideline (150% of Target Liquidity Level) applies to the portfolio and it continues to function as a guideline rather than a hard ceiling (see Table 33). The FY21 Target Liquidity Level is $2 billion higher than the prior year, reflecting the higher Prudential Minimum, which was due to the higher projected debt service for FY21. Table 33: Liquidity Levels Effective for FY21 In billions of U.S. dollars % of Target Liquidity Level Target Liquidity Level $ 68.0 Guideline Maximum Liquidity Level 102.0 150% Prudential Minimum Liquidity Level 54.4 80% Liquid Asset Portfolio as of June 30, 2021 $ 82.8 122% The FY22 Target Liquidity Level is set at $57 billion, $11 billion lower than FY21 Target Liquidity Level due to lower projected debt service for FY22. Operational Risk Operational risk is defined as the risk of financial loss or damage to IBRD’s reputation resulting from inadequate or failed internal processes, people and systems, or from external events. 56 IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2021 Management’s Discussion and Analysis Section IX: Risk Management IBRD recognizes the importance of operational risk management activities, which are embedded in its financial operations. As part of its business activities, IBRD is exposed to a range of operational risks including physical security and staff health and safety, data and cyber security, business continuity, and third-party vendor risks. IBRD’s approach to identifying and managing operational risk includes a dedicated program for these risks and a robust process that includes assessing and prioritizing operational risks, monitoring and reporting relevant key risk indicators, aggregating and analyzing internal and external events, and identifying emerging risks that may affect business units and developing risk response and mitigating actions. Cybersecurity Risk Management IBRD’s operations rely on the secure processing, storage and transmission of confidential and other information in computer systems and networks. As is the case for financial institutions generally, cybersecurity risk continues to be significant for IBRD due to the evolving sophistication and complexity of the cyber threat landscape. These risks are unavoidable and IBRD seeks to manage them on a cost-effective basis consistent with its risk appetite. To protect the security of its computer systems, software, networks and other technology assets, IBRD has developed a cybersecurity risk management program, consisting of cybersecurity policies, procedures, compliance and awareness programs. IBRD deploys a multi-layered approach for cybersecurity risk management to help prevent and detect malicious activity, both from within the organization and from external sources. In managing emerging cyber threats such as malware including ransomware, denial of service and phishing attacks, IBRD strives to adapt its technical and process-level controls and raise the level of user awareness to mitigate the risk. IBRD periodically assesses the maturity and effectiveness of its cyber defenses through risk mitigation techniques, including but not limited to, targeted testing, internal and external audits, incident response desktop exercises and industry benchmarking. IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2021 57 Management’s Discussion and Analysis Section X: Contractual Obligations Section X: Contractual Obligations In conducting its business, IBRD takes on contractual obligations that may require future payments. These include borrowings, operating leases, contractual purchases, capital expenditures, and other long-term liabilities. Table 34 shows IBRD’s contractual obligations for the next five years and thereafter; it excludes the following obligations reflected on IBRD’s balance sheet: undisbursed loans, amounts payable for currency and interest rate swaps, amounts payable for investment securities purchased, guarantees, and cash received under agency arrangements. • Borrowings: IBRD issues debt in the form of securities to private and governmental buyers. • Operating Leases: IBRD leases real estate and equipment under lease agreements for varying periods. Operating lease expenditures represents future cash payments for real estate-related obligations and equipment, based on contractual amounts. • Contractual Purchases: IBRD is a party to various obligations to purchase products and services, which are purchase commitments in the ordinary course of business. • Other Long-Term Liabilities: IBRD provides a variety of benefits to its employees. As some of these benefits are of a long-term nature, IBRD records the associated liability on its balance sheet. The obligations payable represents expected benefit payments as well as contributions to the pension plans. These include future service and pay accruals for current staff and new staff projections for the next 10 years. Operating leases, contractual purchases and capital expenditures, and other long-term obligations, include obligations shared with IDA, IFC, and MIGA under cost-sharing and service arrangements. These arrangements reflect the WBG strategy of maximizing synergies, to best leverage resources for development (see Notes to Financial Statements, Note H for Transactions with Affiliated Organizations). Table 34: Contractual Obligations In millions of U.S. dollars As of June 30, 2021 Due after 1 Due after 3 Due in 1 Due After Year up to 3 Years up to 5 Total year or Less 5 years Years Years Borrowings (at fair value) $ 45,240 $ 57,971 $ 62,577 $ 94,288 $ 260,076 Operating leases 61 87 88 1,220 1,456 Contractual purchases 36 65 - - 101 Other long-term liabilities 633 140 92 173 1,038 Total $ 45,970 $ 58,263 $ 62,757 $ 95,681 $ 262,671 58 IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2021 Management’s Discussion and Analysis Section XI: Pension and Other Post-Retirement Benefits Section XI: Pension and Other Post-Retirement Benefits Governance IBRD participates, along with IFC and MIGA, in pension and post-retirement benefit plans. The Staff Retirement Plan (SRP), Retired Staff Benefits Plan (RSBP), and PEBP (collectively called the “Plans”) are defined benefit plans and cover substantially all WBG employees, retirees and their beneficiaries. Costs, assets, and liabilities associated with the Plans are allocated among IBRD, IFC, and MIGA, based on their employees' respective participation in the Plans. Costs allocated to IBRD are subsequently shared with IDA, based on an agreed cost-sharing ratio (see Notes to Financial Statements, Note J: Pension and Other Post-Retirement Benefits). The benefits of the Plans at retirement are determined pursuant to the Plan Documents adopted by the Board (Plan Document). IBRD has a contractual obligation to make benefit payments to the Plans’ beneficiaries. The governance mechanism of the Plans, including the funding and investment policies described here, are designed to support this objective. There are two committees that govern the Plans. From a governance standpoint, both committees are independent of IBRD and the Board. • The Pension Finance Committee (PFC), which is responsible for the financial management of the Plans and is supported by the Pension Finance Administrator. • The Pension Benefits Administration Committee (PBAC), which is responsible for the administration of the benefits of the Plans. Contributions to the SRP and RSBP are irrevocable, with assets held in separate trusts, and the PEBP assets are included in IBRD's investment portfolio. IBRD acts as trustee for the Plans and the assets are used for the exclusive benefit of the participants and their beneficiaries. The objective of the Plans is to accumulate sufficient assets to meet future pension benefit obligations. As of June 30, 2021, IBRD and IDA’s share of the assets amounted to $30.4 billion (see Table 35). This represents the accumulated contributions paid into the plans net of benefit payments, together with the accumulated value of investment earnings, net of related expenses. Funding and Investment Policies The key policies underpinning the financial management of the Plans, including the determination of WBG contributions and the investment of Plan assets, are the funding and investment policies. The objective of these policies is to ensure that the Plans have sufficient assets to meet benefit payments over the long term. The funding policy, as approved by the PFC, establishes the rules that determine the WBG’s contributions. The policy seeks to fund the Plans in a consistent and timely manner, while at the same time avoiding excessive volatility in WBG contributions. The funding policy determines how much the WBG must contribute annually to sustain and ensure the accumulation of sufficient assets over time to meet the expected benefit payments. Under the Plan Document, the PFC determines the WBG contribution based on actuarial valuations. IBRD is required to make the contribution determined by the PFC. In FY21, the WBG’s rate for contributions to the Plans was 27.82% of net salaries. The Projected Benefit Obligation (PBO) is derived from AA-rated corporate bonds, as required by U.S. GAAP. The selection of this rate as the basis for the discount rate is to establish a liability equivalent to an amount that if invested in high-quality fixed income securities would match the benefit payment stream. While this measure is based on an objective, observable market rate, it does not necessarily reflect the realized or expected returns of the Plan which depend on how the Plans are managed and invested. The PBO for funding purposes is discounted using a 3.5% real discount rate since the funding strategy for the Plans is based on a target of 3.5% real return on investments. This rate constitutes the long-term return objective for the Plan’s assets, referred to as the Long-Term Real Return Objective (LTRRO), which Management has followed since the year ended June 30, 1999 and recently reaffirmed under the strategic asset allocation review in April 2021. If the return on pension assets is 3.5% in real terms and contributions are made at the actuarially required rates (which reflect the long- term cost of the plan benefit), the Plan benefits will be funded over time. The assets of the Plans are diversified across a variety of asset classes, with the objective of achieving returns consistent with the LTRRO over the long term without taking undue risks. The returns on investments for the Plans have met or exceeded the LTRRO on a consistent basis in the long term as well as in recent years. The PFC periodically reviews IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2021 59 Management’s Discussion and Analysis Section XI: Pension and Other Post-Retirement Benefits the LTRRO for realism and appropriateness. See Notes to Financial Statements, Note J: Pension and Other Post- Retirement Benefits for asset allocation, expected return on Plan assets and assumptions used to determine the PBO. Environmental, Social and Governance (ESG) Policies The Plan has a long-standing ESG policy that reflects the latest developments in and understanding of responsible investments and ESG integration. The ESG policy is based on a principled and pragmatic approach in accordance with and subject to the fiduciary standard applicable to the administration and investment of Plan assets. The Plan’s ESG policy states that consideration of ESG factors, including but not limited to environmental practices, worker safety and health standards, and corporate governance, can add value to the investment process and affect assessment of the risk and return characteristics of investments. Projected Benefit Obligation Given that pension plan liabilities can be defined and measured in different ways, it is possible to have different funded status measures for the same plans. The most widely used and publicly disclosed measure of pension plan liabilities is the PBO measure required under U.S. GAAP. It reflects the present value of all retirement benefits earned by participants (adjusted for assumed inflation) as of a given date, including projected salary increases to retirement. Therefore, the PBO measure is an appropriate metric for assessing the ability of the Plans to cover expected benefits as of a certain date. The underlying actuarial assumptions used to determine the PBO, accumulated benefit obligations, and funded status associated with the Plans are based on financial market interest rates, experience, and Management's best estimate of future benefit changes, economic conditions and earnings from plan assets. Table 35: Funded Status of the Plans In millions U.S. dollars As of June 30, 2021 SRP RSBP PEBP Total PBO $ (24,728) $ (4,235) $ (2,339) $ (31,302) Plan assets $ 24,408 $ 4,145 $ 1,806 $ 30,359 Net position $ (320) $ (90) $ (533) $ (943) IBRD's funded status (451) As of June 30, 2020 SRP RSBP PEBP Total PBO $ (23,536) $ (3,997) $ (2,167) $ (29,700) Plan assets $ 19,266 $ 3,195 $ 1,353 $ 23,814 Net position $ (4,270) $ (802) $ (814) $ (5,886) IBRD's funded status (2,731) The discount rate used to convert future obligations into today’s dollars is derived from high-grade, AA-rated corporate bond yields as required by U.S. GAAP. The decrease in the underfunded status of the portion of the pension plans for IBRD and IDA from $5.9 billion as of June 30, 2020 to $0.9 billion as of June 30, 2021, net of PEBP assets, primarily reflects the increase in the value of the Plan Assets due to higher asset returns. As the Plans are managed with a long-term horizon, results over shorter time periods may be impacted positively or negatively by market fluctuations. 60 IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2021 Management’s Discussion and Analysis Section XII: Critical Accounting Policies and the Use of Estimates Section XII: Critical Accounting Policies and the Use of Estimates IBRD’s significant accounting policies, as well as estimates made by Management, are integral to its financial reporting. While all of these policies require a certain level of judgment and estimates, significant policies require Management to make highly difficult, complex, and subjective judgments as these relate to matters inherently uncertain and susceptible to change. Note A to the financial statements contains a summary of IBRD’s significant accounting policies including a discussion of recently issued accounting pronouncements. Fair Value of Financial Instruments The fair values of financial instruments are based on a three-level hierarchy. For financial instruments classified as Level 1 or 2, less judgment is applied in arriving at fair value measures as the inputs are based on observable market data. For financial instruments classified as Level 3, unobservable inputs are used. These require Management to make important assumptions and judgments in determining fair value measures. Investments measured at net asset value per share (or its equivalent) are not classified in the fair value hierarchy. Most of IBRD’s financial instruments which are recorded at fair value are classified as Levels 1 and 2. Table 36 presents the summary of the fair value of financial instruments recorded at fair value on a recurring basis, and the amounts measured using significant Level 3 inputs. IBRD’s level 3 instruments are mainly structured bonds and related swaps held in the borrowing portfolio; these use market observable inputs and unobservable inputs such as correlations and interest rate volatilities. There were no Level 3 instruments in IBRD’s investment or loan portfolios as of June 30, 2021. As of June 30, 2021, all of IBRD’s loans were carried at amortized cost. Table 36: Fair Value Level 3 Summary In millions U.S. dollars For the fiscal year ended June 30, 2021 2020 Total Total Level 3 Level 3 Balance Balance Total Assets at fair value $ 616 $ 106,654 $ 298 $ 104,532 As a percentage of total assets 0.58% 0.29% Total Liabilities at fair value $ 4,877 $ 273,487 $ 5,820 $ 259,235 As a percentage of total liabilities 1.78% 2.25% IBRD reviews the methodology, inputs, and assumptions on a quarterly basis to assess the appropriateness of the fair value hierarchy classification of each financial instrument. Some financial instruments are valued using pricing models. The valuation group, which is independent of treasury and risk management functions, reviews all financial instrument models affecting financial reporting through fair value and assesses model appropriateness and consistency. The review looks at whether the models accurately reflect the characteristics of the transaction and its risks, the suitability and convergence properties of numerical algorithms, the reliability of data sources, the consistency of the treatment with models for similar products, and sensitivity to input parameters and assumptions that cannot be priced from the market. Reviews are conducted of new and/or changed models, as well as previously validated models, to assess whether any changes in the product or market may have affected the model’s continued validity and whether any theoretical or competitive developments may require reassessment of the model’s adequacy. The financial models used for input to IBRD’s financial statements are subject to both internal and periodic external verification and review by qualified personnel. In cases where Management relies on instrument valuations supplied by external pricing vendors, procedures are in place to validate the appropriateness of the models used, as well as the inputs applied in determining those values. IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2021 61 Management’s Discussion and Analysis Section XII: Critical Accounting Policies and the Use of Estimates Provision for Losses on Loans and Other Exposures On July 1, 2020, IBRD adopted ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326) which introduces a new approach to credit loss measurement - the Current Expected Credit Losses (CECL) methodology and requires additional disclosures. See Notes to the Financial Statements, Note A – Summary of Significant Accounting and Related Policies. For IBRD, the primary changes, compared to the previous approach under U.S. GAAP, were to evaluate estimated exposures over the life of the instrument, to incorporate undisbursed loan commitments in the measure of exposure, and to incorporate estimations of future market conditions for a reasonable and supportable forecast period along with historical experience. The overall provision for expected losses is the sum of the computed annual losses, taking into account borrower risk ratings and associated expected default frequencies, estimates of exposure, and severity of loss given default. For loans carried at fair value, if any, the credit risk assessment is a determinant of fair value. The determination of a borrower's risk rating is based on complex variables such as: political risk, external debt and liquidity, fiscal policy and the public debt burden, balance of payments risks, economic structure and growth prospects, monetary and exchange rate policy, and financial sector risks and corporate sector debt and other vulnerabilities. Additionally, estimations of disbursements and repayments of exposures are made, as well as estimations of future interest cash flows based on forward looking market variables. IBRD periodically reviews these variables and reassesses the adequacy of the accumulated provision accordingly. Actual losses may differ from expected losses owing to unforeseen changes in any of the variables affecting the creditworthiness or estimates inherent in the exposure measurements of borrowers. The Credit Risk Committee monitors aspects of country credit risk, in particular, reviewing the provision for losses on loans and guarantees taking into account, among other factors, any changes in exposure, risk ratings of borrowing member countries, or changes between the accrual and nonaccrual portfolios. The accumulated provision for loan losses is reported separately in the balance sheet as a reduction from IBRD’s total loans outstanding. The accumulated provision for losses on loan commitments and other exposures is included in accounts payable and miscellaneous liabilities. Increases or decreases in the accumulated provision for losses on loans and other exposures are reported in the Statement of Income as a provision for losses on loans and other exposures (see Notes to Financial Statements: Note A: Summary of Significant Accounting and Related Policies and Note D: Loans and Other Exposures). Pension and Other Post-Retirement Benefits The underlying actuarial assumptions used to determine the PBO, accumulated benefit obligations, and funded status associated with IBRD pension and other post-retirement benefit plans are based on financial market interest rates, experience, and Management's best estimate of future benefit changes and economic conditions. All costs, assets and liabilities associated with these plans are allocated between IBRD, IFC, and MIGA based upon their employees’ respective participation in the plans. Costs allocated to IBRD are then shared between IBRD and IDA based on an agreed cost-sharing ratio. IDA, IFC and MIGA reimburse IBRD for their proportionate share of any contributions made to these plans by IBRD. Contributions to the plans are calculated as a percentage of salary (see Notes to Financial Statements, Note J: Pension and Other Post-Retirement Benefits). 62 IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2021 Management’s Discussion and Analysis Section XIII: Governance and Controls Section XIII: Governance and Controls Figure 29: Governance Structure Business Conduct The WBG promotes a positive work environment in which staff members understand their ethical obligations to the institution. In support of this commitment, the institution has in place a Code of Conduct. The WBG has both an Ethics Help Line and a Fraud and Corruption hotline. A third-party service offers many methods of worldwide communication. Reporting channels include telephone, mail, email, or confidential submission through a website. IBRD has in place procedures for receiving, retaining, and handling recommendations and concerns relating to business conduct identified during the accounting, internal control, and auditing processes. WBG staff rules clarify and codify the staff’s obligations in reporting suspected fraud, corruption, or other misconduct that may threaten the operations or governance of the WBG. These rules also offer protection from retaliation. General Governance IBRD’s decision-making structure consists of the Board of Governors, Executive Directors, the President, Management, and staff. The Board of Governors is the highest decision-making authority. Governors are appointed by their member governments for a five-year term, which is renewable. The Board of Governors may delegate authority to the Executive Directors to exercise any of its powers, except for certain powers enumerated in IBRD’s Articles. IBRD has its own policies and frameworks that are carried out by staff that share responsibilities over both IBRD and IDA. Executive Directors In accordance with IBRD’s Articles, Executive Directors are appointed or elected every two years by their member governments. The Board currently has 25 Executive Directors, who represent all 189 member countries. Executive Directors are neither officers nor staff of IBRD. The President is the only member of the Board from management, and he serves as a non-voting member and as Chairman of the Board. The Board is required to consider proposals made by the President on IBRD loans, grants and guarantees and on other policies that affect its general operations. The Board is also responsible for presenting to the Governors, at the Annual Meetings, audited accounts, an administrative budget, and an annual report on operations and policies and other matters. The Board and its committees are in continuous session based in Washington DC, as business requires. Each committee's terms of reference establish its respective roles and responsibilities. As committees do not vote on issues, their role is primarily to serve the Board in discharging its responsibilities. IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2021 63 Management’s Discussion and Analysis Section XIII: Governance and Controls The committees are made up of eight members and function under their respective stipulated terms of reference. These committees are as follows: • Audit Committee - assists the Board in overseeing IBRD’s finances, accounting, risk management and internal controls (see further explanation below). • Budget Committee - assists the Board in approving the World Bank’s budget and in overseeing the preparation and execution of IBRD’s business plans. The committee provides guidance to management on strategic directions of IBRD. • Committee on Development Effectiveness - supports the Board in assessing IBRD’s development effectiveness, providing guidance on strategic directions of IBRD, monitoring the quality and results of operations. • Committee on Governance and Executive Directors’ Administrative Matters - assists the Board on issues related to the governance of IBRD, the Board’s own effectiveness, and the administrative policy applicable to Executive Directors’ offices. • Human Resources Committee - strengthens the efficiency and effectiveness of the Board in discharging its oversight responsibility on the World Bank’s human resources strategy, policies and practices, and their alignment with the business needs of the organization. Audit Committee Membership The Audit Committee consists of eight Executive Directors. Membership in the Committee is determined by the Board, based on nominations by the Chairman of the Board, following informal consultation with Executive Directors. Key Responsibilities The Audit Committee is appointed by the Board for the primary purpose of assisting the Board in overseeing IBRD’s finances, accounting, risk management, internal controls and institutional integrity. Specific responsibilities include: • Oversight of the integrity of IBRD’s financial statements. • Appointment, qualifications, independence and performance of the External Auditor. • Performance of the Group Internal Audit. • Adequacy and effectiveness of financial and accounting policies and internal controls’ and the mechanisms to deter, prevent and penalize fraud and corruption in IBRD operations and corporate procurement. • Effective management of financial, fiduciary and compliance risks in IBRD. • Oversight of the institutional arrangements and processes for risk management across IBRD. In carrying out its role, the Audit Committee discusses financial issues and policies that affect IBRD’s financial position and capital adequacy with Management, external auditors, and internal auditors. It recommends the annual audited financial statements for approval to the Board. The Audit Committee monitors and reviews developments in corporate governance and its own role on an ongoing basis. Executive Sessions Under the Audit Committee's terms of reference, it may convene in executive session at any time, without Management’s presence. The Audit Committee meets separately in executive session with the external and internal auditors. Access to Resources and to Management Throughout the year, the Audit Committee receives a large volume of information to enable it to carry out its duties and meets both formally and informally throughout the year to discuss relevant matters. It has complete access to Management, and reviews and discusses with Management topics considered in its terms of reference. The Audit Committee has the authority to seek advice and assistance from outside legal, accounting, or other advisors as it deems necessary. 64 IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2021 Management’s Discussion and Analysis Section XIII: Governance and Controls Auditor Independence The appointment of the external auditor for IBRD is governed by a set of Board-approved principles. These include: • Limits on the external auditor’s provision of non-audit-related services • Requiring all audit-related services to be pre-approved on a case-by-case basis by the Board, upon recommendation of the Audit Committee, and • Renewal of the external audit contract every five years, with a limit of two consecutive terms and mandatory rotation thereafter. In FY17, the Board approved amendments to the policy on the appointment of an external auditor which came into effect for the FY19 audit period. The primary amendments now permit the external auditor to provide non-prohibited non-audit related services subject to monetary limits. Broadly, the list of prohibited non-audit services include those that would put the external auditor in the roles typically performed by management and in a position of auditing their own work, such as accounting services, internal audit services, and provision of investment advice. The total non- audit services fees over the term of the relevant external audit contract shall not exceed 70 percent of the audit fees over the same period. Communication between the external auditor and the Audit Committee is ongoing and carried out as often as deemed necessary by either party. The Audit Committee meets periodically with the external auditor and individual committee members have independent access to the external auditor. IBRD’s external auditors also follow the communication requirements, with the Audit Committees set out under generally accepted auditing standards in the United States. External Auditors The external auditor is appointed to a five-year term, with a limit of two consecutive terms, and is subject to annual reappointment based on the recommendation of the Audit Committee and approval of a resolution by the Board. Following a mandatory rebidding of the external audit contract, IBRD’s Board approved the appointment of Deloitte & Touche LLP as IBRD’s external auditor for a five-year term commencing FY19, subject to annual reappointment. Senior Management Changes There were no Senior Management changes during the year. Internal Control Internal Control Over Financial Reporting Each fiscal year, Management evaluates the internal controls over financial reporting to determine whether any changes made in these controls during the fiscal year materially affect, or would be reasonably likely to materially affect, IBRD’s internal control over financial reporting. The internal control framework promulgated by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), “Internal Control - Integrated Framework (2013)” provides guidance for designing, implementing and conducting internal control and assessing its effectiveness. IBRD uses the 2013 COSO framework to assess the effectiveness of the internal control over financial reporting. As of June 30, 2021, management maintained effective internal control over financial reporting. See “Management’s report regarding effectiveness of Internal Control over Financial Reporting” on page 72. IBRD’s internal control over financial reporting was audited by Deloitte & Touche LLP, and their report expresses an unqualified opinion on the effectiveness of IBRD’s internal control over financial reporting as of June 30, 2021. See Independent Auditor’s Report on page 74. Disclosure Controls and Procedures Disclosure controls and procedures are designed to ensure that information required to be disclosed is gathered and communicated to Management as appropriate, to allow timely decisions regarding required disclosure by IBRD. Management conducted an evaluation of the effectiveness of such controls and procedures and the President and the MDCFO have concluded that these controls and procedures were effective as of June 30, 2021. IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2021 65 Management’s Discussion and Analysis Appendix Appendix Glossary of Terms Articles: IBRD’s Articles of Agreement Below GDI Country: Country whose Gross National Income per capita is below the Graduation Discussion Income as published in the Per Capita Income Guidelines for Operational Purposes. Board: The Executive Directors as established by IBRD’s Articles of Agreement. Budget Anchor: Measure that IBRD uses to monitor the coverage of its net administrative expenses by its loan spread revenue. Capital Adequacy: A measure of IBRD’s ability to withstand unexpected shocks and is based on the amount of IBRD’s usable equity expressed as a percentage of its loans and other related exposures. Credit Default Swaps (CDS): A derivative contract that provides protection against deteriorating credit quality and allows one party to receive payment in the event of a default or specified credit event by a third party. Credit Valuation Adjustment (CVA): The CVA represents the counterparty credit risk exposure and is reflected in the fair value of derivative instruments. Debit Valuation Adjustment (DVA): Debit Valuation Adjustment on Fair Value Option (FVO) Elected Liabilities that corresponds to the change in fair value of the liability presented under the FVO that relate to the instrument specific credit risk (“own-credit risk”). Duration: Provides an indication of the sensitivity of underlying yield to changes in interest rates. Equity-to-Loans Ratio: The Board monitors IBRD’s capital adequacy within a Strategic Capital Adequacy Framework, using the equity-to-loans ratio as a key indicator of IBRD’s capital adequacy. For details on the ratio, see Table 29. Loan Spread Revenue, Net: The spread between loan returns and associated debt cost, assuming loans are fully funded by debt. Lower-Middle-Income Countries: For FY21, income groups are classified according to 2019 gross national income (GNI) per capita. For lower-middle-income countries, the GNI range was $1,036 to $4,045. Maintenance of Value (MOV): Under IBRD’s Articles, members are required to maintain the value of their subscriptions of national currency paid-in, which is subject to certain restrictions. MOV is determined by measuring the foreign exchange value of a member’s national currency against the standard of value of IBRD’s capital based on the 1974 SDR. Lending Operations: Total projects from a fiscal year based on project approval date as of June 30 of the fiscal year. Net Commitments: Commitments net of full terminations and cancellations approved in the same fiscal year and include guarantee commitments and guarantee facilities that have been approved by the Executive Directors. Net Loan Disbursements: Loan disbursements net of repayments and prepayments. Prudential Minimum: The minimum amount of liquidity that IBRD is required to hold and is defined as 80% of the Target Liquidity Level. Sustainable Annual Lending Limit (SALL): The level of lending that can be sustained in real terms over 10 years. Strategic Capital Adequacy Framework: Evaluates IBRD’s capital adequacy as measured by stress tests and an appropriate minimum level for the long-term equity-to-loans ratio. The equity-to-loans ratio provides a background framework in the context of annual net income allocation decisions, as well as in the assessment of the initiatives for the use of capital. The framework has been approved by the Board. Single Borrower Limit (SBL): The maximum authorized exposure to IBRD’s most creditworthy and largest borrowing countries in terms of population and economic size. Statutory Lending Limit (SLL): Under IBRD’s Articles, as applied, the total amount outstanding of loans, participations in loans, and callable guarantees may not exceed the sum of unimpaired subscribed capital, reserves and surplus. Target Liquidity Level (TLL): The twelve- month Target Liquidity Level is calculated before the end of each fiscal year based on Management’s estimates of projected net loan disbursements approved at the time of projection and twelve months of debt- service for the upcoming fiscal year. This twelve-month estimate becomes the target for the upcoming fiscal year. U.S. GAAP: Accounting principles generally accepted in the United States of America. World Bank: The World Bank consists of IBRD and IDA. World Bank Group (WBG): The World Bank Group consists of IBRD, IDA, IFC, MIGA, and ICSID. 66 IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2021 Management’s Discussion and Analysis Appendix Abbreviations and Acronyms AFDB: African Development Bank IFLs: IBRD Flexible Loans AMC: Advance Market Commitment for Vaccines against IPF: Investment Project Financing Pneumococcal Diseases LIBID: London Interbank Bid Rate AOCI: Accumulated Other Comprehensive Income LIBOR: London Interbank Offered Rate BETF: IBRD-Executed Trust Funds LLP: Loan Loss Provision BOG: Board of Governors LTRRO: Long-Term Real Return Objective COSO: Committee of Sponsoring Organizations of the Treadway Commission MDB: Multilateral Development Bank CCSAs: Cross-Cutting Solution Areas MDCAO: Managing Director and World Bank Group Chief Administrative Officer CDS: Credit Default Swaps MDCFO: Managing Director and World Bank Group CVA: Credit Valuation Adjustment Chief Financial Officer CRO: Vice President and WBG Chief Risk Officer MDCOO: Managing Director and Chief Operating Officer DDO: Deferred Drawdown Option MIGA: Multilateral Investment Guarantee Agency DPF: Development Project Financing MOV: Maintenance-Of-Value DTCs: Developing and Transitional Countries NBC: New Business Committee DVA: Debit Valuation Adjustment NCPIC: National Currency Paid-in Capital EAL: Equitable Access Limit ORC: Operational Risk Committee EDF: Expected default frequency PAF: Pilot Auction Facility for Methane and Climate Change Mitigation EEA: Exposure Exchange Agreement PEF: Pandemic Emergency Financing Facility EFOs: Externally Financed Outputs ESG: Environmental, Social and Governance PBAC: Pension Benefits Administration Committee FASB: Financial Accounting Standards Board PBO: Pension Benefit Obligation FIFs: Financial Intermediary Funds PCRF: Post Retirement Contribution Reserve Fund FRC: Finance and Risk Committee PEBP: Post-Employment Benefit Plan GAVI: Global Alliance for Vaccines and Immunization PFC: Pension Finance Committee GCI: General Capital Increase PforR: Program-for-Results GDI: Graduation Discussion Income RAS: Reimbursable Advisory Services GNI: Gross National Income RAMP: Reserves Advisory Management Program GMFs: Grant-Making Facilities RETF: Recipient-Executed Trust Funds GPs: Global Practices RSBP: Retired Staff Benefits Plan IADB: Inter‐American Development Bank SALL: Sustainable Annual Lending Limit IBRD: International Bank for Reconstruction and SCI: Selective Capital Increase Development SDPL: Special Development Policy Loans ICSID: International Centre for Settlement of Investment Disputes SBL: Single Borrower Limit IFC: International Finance Corporation SLL: Statutory Lending Limit IDA: International Development Association SRP: Staff Retirement Plan IFFIm: International Finance Facility for Immunization IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2021 67 Management’s Discussion and Analysis Appendix Eligible Borrowing Member Countries by Region Region Countries Eastern and Southern Africa Angola, Botswana, Eswatini, Kenya*, Mauritius, Namibia, Seychelles, South Africa, Zimbabwe* Western and Central Africa Cabo Verde*, Cameroon*, Republic of Congo*, Equatorial Guinea, Gabon, Nigeria* China, Fiji*, Indonesia, Malaysia, Mongolia, Nauru, Palau, Papua New Guinea*, Philippines, East Asia and Pacific Thailand, Timor-Leste*, Vietnam Albania, Armenia, Azerbaijan, Belarus, Bosnia and Herzegovina, Bulgaria, Croatia, Georgia, Europe and Central Asia Kazakhstan, North Macedonia, Moldova, Montenegro, Poland, Romania, Russian Federation, Serbia, Turkey, Turkmenistan, Ukraine, Uzbekistan* Argentina, Antigua and Barbuda, Belize, Bolivia, Brazil, Chile, Colombia, Costa Rica, Dominica*, Dominican Republic, Ecuador, El Salvador, Grenada*, Guatemala, Jamaica, Mexico, Panama, Latin America and Caribbean Paraguay, Peru, St. Kitts and Nevis, St. Lucia*, St. Vincent and the Grenadines*, Suriname, Trinidad and Tobago, Uruguay, Venezuela Algeria, Arab Republic of Egypt, Islamic Republic of Iran, Iraq, Jordan, Lebanon, Libya, Morocco, Middle East and North Africa Tunisia South Asia India, Pakistan*, and Sri Lanka * Blend countries eligible for IDA and IBRD loans. List of Tables, Figures and Boxes Tables Table 1: Condensed Statement of Income 10 Table 2: Condensed Balance Sheet 10 Table 3: Net Loans Outstanding activity 12 Table 4: Net Other Revenue 14 Table 5: Net Non-Interest Expenses 15 Table 6: Budget Anchor Ratio 15 Table 7: Unrealized Mark-to-Market gains/losses on non-trading portfolios, net 16 Table 8: Allocable Income 18 Table 9: Net Commitments by Region 20 Table 10: Gross Disbursements by Region 21 Table 11: Net Commitments by Maturity 22 Table 12: Country Pricing Group and Maturity Premium (in basis points) 23 Table 13: Loan Terms Available During Fiscal Year Ended June 30, 2021 24 Table 14: Loans outstanding by interest rate structure, excluding derivatives 25 Table 15: Guarantees Exposure 26 Table 16: Pricing for IBRD Project-Based and Policy-Based Guarantees 27 Table 17: Exposure Exchange Agreements 27 Table 18: RAMP – Assets and Revenues 29 Table 19: Cash and Investment Assets Held in Trust 29 Table 20: Liquid Asset Portfolio Composition 32 Table 21: Liquid Asset Portfolio - Average Balances and Returns 32 Table 22: Net Carrying Value of Other Investments 32 Table 23: Short-Term Borrowings 34 Table 24: Funding Operations Indicators 35 Table 25: Maturity Profile of Medium and Long-Term Debt 35 Table 26: Breakdown of IBRD Subscribed Capital 36 Table 27: Usable Paid-In Capital 37 Table 28: Usable Equity 38 Table 29: Equity-to-Loans Ratio 44 Table 30: Commercial Credit Exposure, Net of Collateral Held, by Counterparty Rating 49 Table 31: Effect of Credit on IBRD’s Portfolios 51 Table 32: Effect of Interest Rates on IBRD’s Portfolios 52 Table 33: Liquidity Levels 56 Table 34: Contractual Obligations 58 Table 35: Funded Status of the Plans 60 Table 36: Fair Value Level 3 Summary 61 68 IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2021 Management’s Discussion and Analysis Appendix Figures Figure 1: IBRD’s Financial Business Model 7 Figure 2: Sources and Uses of Revenue 8 Figure 3: Net Loans Outstanding 12 Figure 4: Loan Interest Revenue, net 12 Figure 5: Derived Spread 12 Figure 6: Net Investment Portfolio 13 Figure 7: Borrowing Portfolio (original maturities) 13 Figure 8: Net Non-Interest Expenses 14 Figure 9: Budget Anchor 15 Figure 10: FY21 Allocable Income and Income Allocation 19 Figure 11: Share of Lending Categories for Annual Net Commitments 21 Figure 12: Loan Portfolio 25 Figure 13: Liquid Asset Portfolio by Asset Class 31 Figure 14: Effect of Derivatives on Currency Composition of the Borrowing Portfolio–June 30, 2021 33 Figure 15: Medium- and Long-Term Borrowings Raised by Currency during the year, Excluding Derivatives 35 Figure 16: Voting Power of Top Six Members as of June 30, 2021 36 Figure 17: Percentage of Votes held by Member Countries, as of June 30, 2021 36 Figure 18: Financial and Operational Risk Management Structure 39 Figure 19: Risk Committee Structure for Financial and Operational Risks 41 Figure 20: Equity-to-Loans Ratio 43 Figure 21: Country Exposures as of June 30, 2021 46 Figure 22: Sensitivity to Interest Rates 52 Figure 23: Effect of Derivatives on Interest Rate Structure of the Borrowing Portfolio - June 30, 2021 52 Figure 24: Effect of Derivatives on Interest Rate Structure of the Loan Portfolio - June 30, 2021 53 Figure 25: Use of Derivatives for Loans and Borrowings 53 Figure 26: Use of Derivatives for Investments 53 Figure 27: Use of Derivatives for Other ALM 54 Figure 28: Currency Composition of Loan and Borrowing Portfolios as of June 30, 2021 56 Figure 29: Governance Structure 63 Boxes Box 1: Selected Financial Data 2 Box 2: Components of Loan spread 22 Box 3: Other Lending Products Currently Available 23 Box 4: Types of Guarantees Provided by IBRD 26 Box 5: Financing Instruments 29 Box 6: Summary of IBRD's Specific Risk Categories 42 Box 7: Treatment of Overdue Payments 47 Box 8: Eligibility Criteria for IBRD's Investments a 49 IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2021 69 Management’s Discussion and Analysis Appendix This page intentionally left blank 70 IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2021 INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT FINANCIAL STATEMENTS AND INTERNAL CONTROL REPORTS JUNE 30, 2021 Management’s Report Regarding Effectiveness of Internal Control Over Financial Reporting 72 Independent Auditors’ Report on Effectiveness of Internal Control Over Financial Reporting 74 Independent Auditors’ Report 76 Balance Sheet 78 Statement of Income 80 Statement of Comprehensive Income 81 Statement of Changes in Retained Earnings 81 Statement of Cash Flows 82 Supplemental Information Summary Statement of Loans 84 Statement of Subscriptions to Capital Stock and Voting Power 86 Notes to Financial Statements 90 IBRD FINANCIAL STATEMENTS: JUNE 30, 2021 71 MANAGEMENT’S REPORT REGARDING EFFECTIVENESS OF INTERNAL CONTROL OVER EXTERNAL FINANCIAL REPORTING Management’s Report Regarding Effectiveness of Internal Control over Financial Reporting August 6, 2021 The management of the International Bank for Reconstruction and Development (IBRD) is responsible for the preparation, integrity, and fair presentation of its published financial statements. The financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and include amounts based on informed judgments and estimates made by management. The financial statements have been audited by an independent audit firm, which was given unrestricted access to all financial records and related data, including minutes of all meetings of the Executive Directors and their Committees. Management believes that all representations made to the independent auditors during their audit of IBRD’s financial statements and audit of its internal control over financial reporting were valid and appropriate. The independent auditors’ reports accompany the audited financial statements. Management is responsible for establishing and maintaining effective internal control over financial reporting for financial statement presentations in conformity with accounting principles generally accepted in the United States of America. Management maintains a comprehensive system of controls intended to ensure that transactions are executed in accordance with management’s authorization, assets are safeguarded, and financial records are reliable. The system of internal control contains monitoring mechanisms, and actions are taken to correct deficiencies identified. Management believes that internal control over financial reporting supports the integrity and reliability of the external financial statements. There are inherent limitations in the effectiveness of any internal control, including the possibility of human error and the circumvention or overriding of controls. Accordingly, even effective internal controls can provide only reasonable assurance with respect to financial statement preparation. Further, because of changes in conditions, the effectiveness of internal controls may vary over time. IBRD assessed its internal control over financial reporting for financial statement presentation in conformity with accounting principles generally accepted in the United States of America as of June 30, 2021. This assessment was based on the criteria for effective internal control over financial reporting described in the Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based upon this assessment, management believes that IBRD maintained effective internal control over financial reporting presented in conformity with accounting principles generally accepted in the United States of America as of June 30, 2021. The independent audit firm that audited the financial 72 IBRD FINANCIAL STATEMENTS: JUNE 30, 2021 statements has issued an Independent Auditors Report which expresses an opinion on IBRD’s internal control over financial reporting. The Executive Directors of IBRD have appointed an Audit Committee responsible for monitoring the accounting practices and internal controls of IBRD. The Audit Committee is comprised entirely of Executive Directors who are independent of IBRD’s management. The Audit Committee is responsible for recommending to the Executive Directors the selection of independent auditors. It meets periodically with management, the independent auditors, and the internal auditors to ensure that they are carrying out their responsibilities. The Audit Committee is responsible for performing an oversight role by reviewing and monitoring the financial, accounting and auditing procedures of IBRD in addition to reviewing IBRD’s financial reports. The independent auditors and the internal auditors have full and free access to the Audit Committee, with or without the presence of management, to discuss the adequacy of internal control over financial reporting and any other matters which they believe should be brought to the attention of the Audit Committee. ________________________ David Malpass President _______________________ Anshula Kant Managing Director and World Bank Group Chief Financial Officer ________________________ Jorge Familiar Calderon Vice President and World Bank Group Controller IBRD FINANCIAL STATEMENTS: JUNE 30, 2021 73 INDEPENDENT AUDITORS’ REPORT ON MANAGEMENT’S ASSERTION REGARDING EFFECTIVENESS OF INTERNAL CONTROL OVER FINANCIAL REPORTING Deloitte & Touche LLP 7900 Tysons One Place Suite 800 McLean, VA 22102 USA Tel: +1 703 251 1000 Fax: +1 703 251 3400 www.deloitte.com INDEPENDENT AUDITORS' REPORT President and Board of Executive Directors International Bank for Reconstruction and Development: We have audited the internal control over financial reporting of the International Bank for Reconstruction and Development ("IBRD") as of June 30, 2021, based on the criteria established in the Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Management’s Responsibility for Internal Control over Financial Reporting Management is responsible for designing, implementing, and maintaining effective internal control over financial reporting, and for its assessment about the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report Regarding Effectiveness of Internal Control Over Financial Reporting. Auditors’ Responsibility Our responsibility is to express an opinion on IBRD’s internal control over financial reporting based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. An audit of internal control over financial reporting involves performing procedures to obtain audit evidence about whether a material weakness exists. The procedures selected depend on the auditor’s judgment, including the assessment of the risks that a material weakness exists. An audit includes obtaining an understanding of internal control over financial reporting and testing and evaluating the design and operating effectiveness of internal control over financial reporting based on the assessed risk. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Definition and Inherent Limitations of Internal Control over Financial Reporting An entity’s internal control over financial reporting is a process effected by those charged with governance, management, and other personnel, designed to provide reasonable assurance regarding the preparation of reliable financial statements in accordance with accounting principles generally accepted in the United States of America. An entity’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the entity; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures of the entity are being made only in accordance with authorizations of management and those charged with governance; and (3) provide reasonable assurance regarding prevention, or timely detection and correction, of unauthorized acquisition, use, or disposition of the entity's assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent, or detect and correct, misstatements. Also, projections of any assessment of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. 74 Opinion In our opinion, IBRD maintained, in all material respects, effective internal control over financial reporting as of June 30, 2021 based on the criteria established in the Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Report on Financial Statements We have also audited, in accordance with auditing standards generally accepted in the United States of America, the financial statements as of and for the year ended June 30, 2021 of IBRD, and our report dated August 6, 2021 expressed an unmodified opinion on those financial statements. August 6, 2021 75 INDEPENDENT AUDITORS’ REPORT Deloitte & Touche LLP 7900 Tysons One Place Suite 800 McLean, VA 22102 USA Tel.: +1 703 251 1000 Fax: +1 703 251 3400 www.deloitte.com INDEPENDENT AUDITORS’ REPORT President and Board of Executive Directors International Bank for Reconstruction and Development: We have audited the accompanying financial statements of the International Bank for Reconstruction and Development ("IBRD"), which comprise the balance sheets as of June 30, 2021 and 2020, and the related statements of income, comprehensive income, changes in retained earnings, and cash flows for each of the three years in the period ended June 30, 2021, and the related notes to the financial statements. Management's Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditors' Responsibility Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to IBRD’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of IBRD as of June 30, 2021 and 2020, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 2021 in accordance with accounting principles generally accepted in the United States of America. 76 Change in Accounting Principle As described in Note A to the financial statements, IBRD changed its method of accounting for the accumulated provision for loan losses and other exposures on July 1, 2020, due to the adoption of Accounting Standards Update No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. Report on Supplementary Information Our audits were conducted for the purpose of forming an opinion on the financial statements as a whole. The summary statement of loans and the statement of subscriptions to capital stock and voting power as of June 30, 2021 ("supplementary information") listed in the table of contents are presented for the purpose of additional analysis and are not a required part of the financial statements. This supplementary information is the responsibility of IBRD's management and was derived from and relates directly to the underlying accounting and other records used to prepare the financial statements. Such information has been subjected to the auditing procedures applied in our audits of the financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the financial statements or to the financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, such information is fairly stated in all material respects in relation to the financial statements as a whole. Report on Internal Control over Financial Reporting We have also audited, in accordance with auditing standards generally accepted in the United States of America, IBRD's internal control over financial reporting as of June 30, 2021, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated August 6, 2021 expressed an unmodified opinion on IBRD's internal control over financial reporting. August 6, 2021 77 BALANCE SHEET June 30, 2021 and June 30, 2020 Expressed in millions of U.S. dollars 2021 2020 Assets Due from banks—Notes C and L Unrestricted cash $ 2,240 $ 1,748 Restricted cash 107 122 2,347 1,870 Investments-Trading (including securities transferred under repurchase or securities lending agreements of $24 million—June 30, 2021; $8 million— June 30, 2020)—Notes C and L 87,566 83,767 Securities purchased under resale agreements—Notes C and L 338 394 Derivative assets, net—Notes C, F and L 3,355 3,744 Other receivables Receivable from investment securities traded—Note C 200 93 Accrued income on loans 994 1,358 1,194 1,451 Loans outstanding (Summary Statement of Loans, Notes D, H and L) Total loans 295,005 274,047 Less undisbursed balance (including signed loan commitments of $59,837 million — June 30, 2021, and $54,834 million —June 30, 2020) (74,441) (69,816) Loans outstanding 220,564 204,231 Less: Accumulated provision for loan losses (1,270) (1,599) Deferred loan income (495) (474) Net loans outstanding 218,799 202,158 Other assets Premises and equipment, net 1,775 1,734 Miscellaneous—Notes E, H and I 1,927 1,686 3,702 3,420 Total assets $ 317,301 $ 296,804 78 IBRD FINANCIAL STATEMENTS: JUNE 30, 2021 2021 2020 Liabilities Borrowings—Notes E and L $ 260,076 $ 243,240 Securities sold under repurchase agreements, securities lent under securities lending agreements, and payable for cash collateral received—Notes C and L 62 36 Derivative liabilities, net—Notes C, F and L 1,222 1,473 Other liabilities Payable for investment securities purchased—Note C 521 265 Liabilities under retirement benefits plans—Notes J and K 2,749 7,239 Accounts payable and miscellaneous liabilities—Notes D, H and I 4,593 4,164 7,863 11,668 Total liabilities 269,223 256,417 Equity Capital stock (Statement of Subscriptions to Capital Stock and Voting Power, Note B) Authorized capital (2,783,873 shares—June 30, 2021, and June 30, 2020) Subscribed capital (2,469,065 shares—June 30, 2021, and 2,387,388 shares—June 30, 2020) 297,856 288,002 Less uncalled portion of subscriptions (278,612) (269,968) Paid-in capital 19,244 18,034 Nonnegotiable, noninterest-bearing demand obligations on account of subscribed capital (332) (373) Receivable amounts to maintain value of currency holdings—Note B (343) (299) Deferred amounts to maintain value of currency holdings—Note B 67 (14) Retained earnings (Statement of Changes in Retained Earnings and Note G) 31,007 28,765 Accumulated other comprehensive loss—Note K (1,565) (5,726) Total equity 48,078 40,387 Total liabilities and equity $ 317,301 $ 296,804 The Notes to Financial Statements are an integral part of these Statements. IBRD FINANCIAL STATEMENTS: JUNE 30, 2021 79 STATEMENT OF INCOME For the fiscal years ended June 30, 2021, June 30, 2020 and June 30, 2019 Expressed in millions of U.S. dollars 2021 2020 2019 Interest revenue Loans, net—Note D $ 2,213 $ 4,537 $ 5,170 Other asset/liability management derivatives, net—Notes F and L 604 161 (57) Investments-Trading, net—Notes C 211 1,270 1,478 Other, net (2) (116) (26) Borrowing expenses, net—Note E (662) (3,754) (4,778) Interest revenue, net of borrowing expenses 2,364 2,098 1,787 Provision for losses on loans and other exposures—Note D (146) (18) (50) Non-interest revenue Revenue from externally funded activities—Notes H and I 776 802 908 Commitment charges—Note D 115 115 107 Other, net—Note I 36 56 35 Total 927 973 1,050 Non-interest expenses Administrative—Notes H, I and J (2,142) (2,080) (2,119) Pension—Note A and J (11) 57 62 Contributions to special programs (18) (18) (18) Other (22) (22) (23) Total (2,193) (2,063) (2,098) Board of Governors-approved and other transfers—Note G (411) (340) (338) Non-functional currency translation adjustment gains (losses), net 35 57 (30) Unrealized mark-to-market gains on Investments-Trading portfolio, net—Notes F and L 231 193 450 Unrealized mark-to-market gains (losses) on non-trading portfolios, net Loan derivatives—Notes D, F and L 2,415 (1,971) (1,485) Other asset/liability management derivatives, net—Notes F and L (1,351) 1,204 1,084 Borrowings, including derivatives—Notes E, F and L 154 (216) 120 Client operations derivatives —Note L 14 41 15 Total 1,232 (942) (266) Net income (loss) $ 2,039 $ (42) $ 505 The Notes to Financial Statements are an integral part of these Statements. 80 IBRD FINANCIAL STATEMENTS: JUNE 30, 2021 STATEMENT OF COMPREHENSIVE INCOME For the fiscal years ended June 30, 2021, June 30, 2020 and June 30, 2019 Expressed in millions of U.S. dollars 2021 2020 2019 Net income (loss) $ 2,039 $ (42) $ 505 Other comprehensive income (loss)—Note K Reclassification to net income: Derivatives and hedging transition adjustment - - 2 Net actuarial gains (losses) on benefit plans 5,105 (3,067) (1,255) Prior service credit on benefit plans, net 23 23 24 Net Change in Debit Valuation Adjustment on fair value option elected liabilities—Note L (1,432) 509 550 Currency translation adjustment on functional currency 465 (88) (157) Total other comprehensive income (loss) 4,161 (2,623) (836) Total comprehensive income (loss) $ 6,200 $ (2,665) $ (331) STATEMENT OF CHANGES IN RETAINED EARNINGS For the fiscal years ended June 30, 2021, June 30, 2020 and June 30, 2019 Expressed in millions of U.S. dollars 2021 2020 2019 Retained earnings at the beginning of the fiscal year $ 28,765 $ 28,807 $ 28,457 Cumulative effect of a change in accounting principle—Notes A, D, G and J 203 - (155) Adjusted retained earnings at the beginning of the fiscal year 28,968 28,807 28,302 Net income (loss) for the fiscal year 2,039 (42) 505 Retained earnings at the end of the fiscal year $ 31,007 $ 28,765 $ 28,807 The Notes to Financial Statements are an integral part of these Statements. IBRD FINANCIAL STATEMENTS: JUNE 30, 2021 81 STATEMENT OF CASH FLOWS For the fiscal years ended June 30, 2021, June 30, 2020 and June 30, 2019 Expressed in millions of U.S. dollars 2021 2020 2019 Cash flows from investing activities Loans Disbursements $ (23,651) $ (20,193) $ (20,143) Principal repayments 10,020 9,365 9,688 Principal prepayments 81 251 403 Loan origination fees received 24 15 16 Net derivatives-loans 64 69 53 Other investing activities, net (175) (241) (146) Net cash used in investing activities (13,637) (10,734) (10,129) Cash flows from financing activities Medium and long-term borrowings New issues 67,365 75,055 53,987 Retirements (51,692) (64,982) (36,110) Short-term borrowings (original maturities greater than 90 days) New issues 21,937 22,722 16,293 Retirements (20,469) (23,126) (11,609) Net short-term borrowings (original maturities less than 90 days) (2,270) 1,202 (5,077) Net derivatives-borrowings (758) (1,229) (2,071) Capital subscriptions 1,210 973 605 Other financing activities, net 6 2 (1) Net cash provided by financing activities 15,329 10,617 16,017 Cash flows from operating activities Net income (loss) 2,039 (42) 505 Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities: Unrealized mark-to-market (gains) losses on non-trading portfolios, net (1,232) 942 266 Non-functional currency translation adjustment (gains) losses, net (35) (57) 30 Depreciation and amortization 94 896 897 Provision for losses on loans and other exposures 146 18 50 Changes in: Investments-Trading (2,359) (2,711) (8,885) Net investment securities purchased/traded 137 230 (49) Net derivatives-investments (1,406) 532 1,199 Net securities purchased/sold under resale/repurchase agreements and payable for cash collateral received 1,171 1,602 267 Accrued income on loans 449 403 (296) Miscellaneous assets (239) (470) 25 Accrued interest on borrowings (811) (952) (133) Accounts payable and miscellaneous liabilities 761 718 518 Net cash (used in) provided by operating activities (1,285) 1,109 (5,606) Effect of exchange rate changes on unrestricted and restricted cash 70 (17) (6) Net increase (decrease) in unrestricted and restricted cash 477 975 276 Unrestricted and restricted cash at the beginning of the fiscal year 1,870 895 619 Unrestricted and restricted cash at the end of the fiscal year $ 2,347 $ 1,870 $ 895 82 IBRD FINANCIAL STATEMENTS: JUNE 30, 2021 Expressed in millions of U.S. dollars 2021 2020 2019 Supplemental disclosure (Decrease) increase in ending balances resulting from exchange rate fluctuations Loans outstanding $ 2,742 $ (1,178) $ (893) Investment portfolio 277 126 (18) Borrowing portfolio (1,971) (274) (632) Capitalized loan origination fees included in total loans 39 45 39 Interest paid on borrowing portfolio 1,488 4,616 4,640 The Notes to Financial Statements are an integral part of these Statements. IBRD FINANCIAL STATEMENTS: JUNE 30, 2021 83 SUMMARY STATEMENT OF LOANS June 30, 2021 Expressed in millions of U.S. dollars Undisbursed balance Loans Percentage of approved but Signed loan Loans total loans Borrower or guarantor Total loans a,b not yet signed commitment c Outstanding outstanding d Albania b $ 1,135 $ - $ 200 $ 935 0.42 % Angola a 3,342 500 1,558 1,284 0.58 Antigua and Barbuda 4 - - 4 * Argentina 10,894 1,162 1,879 7,853 3.56 Armenia b 1,007 - 165 842 0.38 Azerbaijan 1,907 65 146 1,696 0.77 Bahamas, The 100 - - 100 0.05 Barbados 124 - - 124 0.06 Belarus 1,578 - 607 971 0.44 Belize 39 - 2 37 0.02 Bolivia, Plurinational State of a 1,017 - 459 558 0.25 Bosnia and Herzegovina b 910 - 210 700 0.32 Botswana a 645 250 171 224 0.10 Brazil b 18,516 647 2,539 15,330 6.95 Bulgaria 638 - - 638 0.29 Cabo Verde, Republic of 44 - - 44 0.02 Cameroon 756 - 463 293 0.13 Chile a 158 - 20 138 0.06 China b 22,206 1,323 5,134 15,749 7.14 Colombia a 13,642 100 598 12,944 5.87 Congo, Republic of 163 - 58 105 0.05 Costa Rica a 1,871 300 264 1,307 0.59 Cote d'Ivoire 195 - 98 97 0.04 Croatia 2,176 - 618 1,558 0.71 Dominican Republic a 1,464 43 242 1,179 0.53 Ecuador a 3,561 - 869 2,692 1.22 Egypt, Arab Republic of b 14,381 - 2,678 11,703 5.31 El Salvador 1,532 - 770 762 0.35 Eswatini 189 5 98 86 0.04 Fiji 152 - 43 109 0.05 Gabon a 865 - 203 662 0.30 Georgia b 1,759 - 578 1,181 0.54 Grenada 16 - 6 10 * Guatemala 2,486 670 97 1,719 0.78 India b 29,301 2,082 9,114 18,105 8.21 Indonesia b 23,523 1,200 3,857 18,466 8.37 Iran, Islamic Republic of 105 - - 105 0.05 Iraq b 4,552 - 1,229 3,323 1.51 Jamaica 1,168 10 75 1,083 0.49 Jordan b 4,667 840 659 3,168 1.44 Kazakhstan 4,889 - 1,379 3,510 1.59 Kenya 510 - 211 299 0.14 Kosovo 141 - - 141 0.06 Lebanon 1,323 - 766 557 0.25 Mauritius 174 - - 174 0.08 Mexico 17,736 1,095 988 15,653 7.10 Moldova 234 - 118 116 0.05 Mongolia 134 100 2 32 0.01 Montenegro b 311 - 91 220 0.10 Morocco 10,472 999 1,527 7,946 3.60 Nigeria a 1,000 500 89 411 0.19 North Macedonia b 1,001 44 324 633 0.29 Pakistan b 5,168 - 3,331 1,837 0.83 Panama a 1,549 - 85 1,464 0.66 Papua New Guinea 36 30 - 6 * Paraguay 1,113 - 265 848 0.38 Peru 5,321 418 1,386 3,517 1.59 Philippines 11,895 980 1,757 9,158 4.15 Poland 7,619 - 292 7,327 3.32 84 IBRD FINANCIAL STATEMENTS: JUNE 30, 2021 SUMMARY STATEMENT OF LOANS (continued) June 30, 2021 Expressed in millions of U.S. dollars Undisbursed balance Loans approved but Percentage of not yet Signed loan Loans total loans Borrower or guarantor Total loans a,b signed commitments c Outstanding outstanding d Romania b $ 6,634 $ - $ 1,401 $ 5,233 2.37 % Russian Federation 225 - 22 203 0.09 Serbia b 3,350 - 776 2,574 1.17 Seychelles 102 - 33 69 0.03 South Africa a 2,452 - 355 2,097 0.95 Sri Lanka 964 350 246 368 0.17 St. Lucia 3 - - 3 * Suriname 58 - 53 5 * Thailand 792 - - 792 0.36 Timor-Leste 15 - - 15 0.01 Trinidad and Tobago a 20 - 20 - * Tunisia 5,116 - 1,052 4,064 1.84 Turkey b 16,409 394 4,474 11,541 5.23 Turkmenistan 20 20 - - * Ukraine b 7,857 377 1,365 6,115 2.77 Uruguay 1,510 - 314 1,196 0.54 Uzbekistan 2,526 - 649 1,877 0.85 Vietnam 3,106 100 759 2,247 1.02 Zimbabwe 432 - - 432 0.20 Total-June 30, 2021 $ 295,005 $ 14,604 $ 59,837 $ 220,564 100 % Notes a. Indicates a country for which a guarantee is provided under an Exposure Exchange Agreement (EEA) with a multilateral development organization (see Note D—Loans and Other Exposures). The amount of the guarantees is not included in the figures of the Statement above. b. Indicates a country for which a guarantee has been received, under an EEA with a multilateral development organization or from another guarantee provider (see Note D—Loans and Other Exposures). The effect of the guarantee is not included in the figures of the Statement above. c. Loan agreements totaling $8,992 million ($3,064 million—June 30, 2020) have been signed, but the loans are not effective and disbursements do not start until the borrowers and/or guarantors take certain actions and furnish documents. d. May differ from the calculated figures or sum of individual figures shown due to rounding. * Indicates amount less than $0.5 million or 0.005 percent The Notes to Financial Statements are an integral part of these Statements. IBRD FINANCIAL STATEMENTS: JUNE 30, 2021 85 STATEMENT OF SUBSCRIPTIONS TO CAPITAL STOCK AND VOTING POWER June 30, 2021 Expressed in millions of U.S. dollars Subscriptions Voting Power Amounts Percentage Total Amounts subject to call Number of Percentage Member Shares of total b amounts b paid in a,b a, b votes of total b Afghanistan 506 0.02 % $ 61.0 $ 5.1 $ 55.9 1,274 0.05 % Albania 1,187 0.05 143.2 5.4 137.8 1,955 0.07 Algeria 12,706 0.51 1,532.8 101.7 1,431.1 13,474 0.52 Angola 4,068 0.16 490.7 28.8 461.9 4,836 0.18 Antigua and Barbuda 659 0.03 79.5 2.3 77.2 1,427 0.05 Argentina 26,387 1.07 3,183.2 191.6 2,991.5 27,155 1.04 Armenia 1,765 0.07 212.9 10.2 202.7 2,533 0.10 Australia c 34,576 1.40 4,171.1 276.9 3,894.2 35,344 1.35 Austria c 18,143 0.73 2,188.7 157.4 2,031.3 18,911 0.72 Azerbaijan 2,497 0.10 301.2 15.3 286.0 3,265 0.12 Bahamas, The 1,357 0.05 163.7 7.5 156.2 2,125 0.08 Bahrain 1,523 0.06 183.7 9.9 173.9 2,291 0.09 Bangladesh 6,907 0.28 833.2 54.4 778.8 7,675 0.29 Barbados 948 0.04 114.4 4.5 109.9 1,716 0.07 Belarus 4,547 0.18 548.5 34.6 513.9 5,315 0.20 Belgium c 38,586 1.56 4,654.8 297.4 4,357.4 39,354 1.51 Belize 586 0.02 70.7 1.8 68.9 1,354 0.05 Benin 1,399 0.06 168.8 7.9 160.9 2,167 0.08 Bhutan 680 0.03 82.0 2.0 80.0 1,448 0.06 Bolivia, Plurinational State of 2,705 0.11 326.3 16.8 309.5 3,473 0.13 Bosnia and Herzegovina 887 0.04 107.0 8.8 98.2 1,655 0.06 Botswana 916 0.04 110.5 5.4 105.1 1,684 0.06 Brazil 53,509 2.17 6,455.1 386.8 6,068.3 54,277 2.08 Brunei Darussalam 2,373 0.10 286.3 15.2 271.1 3,141 0.12 Bulgaria 6,608 0.27 797.2 46.6 750.5 7,376 0.28 Burkina Faso 1,260 0.05 152.0 5.8 146.2 2,028 0.08 Burundi 1,043 0.04 125.8 4.6 121.3 1,811 0.07 Cabo Verde, Republic of 729 0.03 87.9 2.3 85.7 1,497 0.06 Cambodia 493 0.02 59.5 4.6 54.9 1,261 0.05 Cameroon 2,202 0.09 265.6 12.4 253.3 2,970 0.11 Canada c 70,455 2.85 8,499.3 619.5 7,879.8 71,223 2.72 Central African Republic 975 0.04 117.6 3.9 113.8 1,743 0.07 Chad 975 0.04 117.6 3.9 113.8 1,743 0.07 Chile 10,013 0.41 1,207.9 71.9 1,136.0 10,781 0.41 China 130,671 5.29 15,763.5 1,042.9 14,720.6 131,439 5.03 Colombia 9,730 0.39 1,173.8 69.7 1,104.1 10,498 0.40 Comoros 369 0.01 44.5 1.0 43.5 1,137 0.04 Congo, Democratic Republic Of 3,416 0.14 412.1 31.0 381.1 4,184 0.16 Congo, Republic of 1,051 0.04 126.8 4.3 122.4 1,819 0.07 Costa Rica 1,230 0.05 148.4 9.9 138.4 1,998 0.08 Cote d'Ivoire 4,080 0.17 492.2 30.4 461.8 4,848 0.19 Croatia 3,093 0.13 373.1 25.0 348.2 3,861 0.15 Cyprus 1,851 0.07 223.3 11.2 212.1 2,619 0.10 Czech Republic c 8,578 0.35 1,034.8 67.7 967.1 9,346 0.36 Denmark c 19,277 0.78 2,325.5 155.3 2,170.2 20,045 0.77 Djibouti 801 0.03 96.6 2.8 93.8 1,569 0.06 Dominica 644 0.03 77.7 2.2 75.4 1,412 0.05 Dominican Republic 2,651 0.11 319.8 17.2 302.6 3,419 0.13 Ecuador 3,828 0.16 461.8 24.1 437.7 4,596 0.18 Egypt, Arab Republic of 10,682 0.43 1,288.6 76.8 1,211.8 11,450 0.44 86 IBRD FINANCIAL STATEMENTS: JUNE 30, 2021 STATEMENT OF SUBSCRIPTIONS TO CAPITAL STOCK AND VOTING POWER (continued) June 30, 2021 Expressed in millions of U.S. dollars Subscriptions Voting Power Percentage Total amounts Amounts Amounts subject Number of Percentage of Member Shares of total b b paid in a,b to call a, b votes total b El Salvador 330 0.01 % $ 39.8 $ 3.1 $ 36.7 1,098 0.04 % Equatorial Guinea 715 0.03 86.3 2.7 83.5 1,483 0.06 Eritrea 593 0.02 71.5 1.8 69.7 1,361 0.05 Estonia 1,272 0.05 153.4 7.8 145.7 2,040 0.08 Eswatini 499 0.02 60.2 2.0 58.2 1,267 0.05 Ethiopia 1,470 0.06 177.3 8.3 169.1 2,238 0.09 Fiji 1,251 0.05 150.9 6.7 144.2 2,019 0.08 Finland c 12,010 0.49 1,448.8 91.7 1,357.2 12,778 0.49 France c 101,328 4.10 12,223.7 842.9 11,380.8 102,096 3.91 Gabon 987 0.04 119.1 5.1 113.9 1,755 0.07 Gambia, The 777 0.03 93.7 2.7 91.0 1,545 0.06 Georgia 2,275 0.09 274.4 12.7 261.7 3,043 0.12 Germany c 109,776 4.45 13,242.8 913.3 12,329.6 110,544 4.23 Ghana 2,202 0.09 265.6 16.1 249.5 2,970 0.11 Greece c 4,057 0.16 489.4 33.8 455.6 4,825 0.18 Grenada 673 0.03 81.2 2.4 78.8 1,441 0.06 Guatemala 2,001 0.08 241.4 12.4 229.0 2,769 0.11 Guinea 1,864 0.08 224.9 9.9 214.9 2,632 0.10 Guinea-Bissau 613 0.02 73.9 1.4 72.5 1,381 0.05 Guyana 1,526 0.06 184.1 7.7 176.4 2,294 0.09 Haiti 1,550 0.06 187.0 7.8 179.2 2,318 0.09 Honduras 641 0.03 77.3 2.3 75.0 1,409 0.05 Hungary c 11,624 0.47 1,402.3 92.6 1,309.6 12,392 0.47 Iceland c 1,858 0.08 224.1 12.6 211.6 2,626 0.10 India 79,073 3.20 9,539.0 646.0 8,893.0 79,841 3.05 Indonesia 24,197 0.98 2,919.0 183.7 2,735.3 24,965 0.95 Iran, Islamic Republic of 34,963 1.42 4,217.8 254.3 3,963.4 35,731 1.37 Iraq 3,875 0.16 467.5 33.0 434.5 4,643 0.18 Ireland c 8,437 0.34 1,017.8 65.3 952.5 9,205 0.35 Israel 6,019 0.24 726.1 42.4 683.7 6,787 0.26 Italy c 65,305 2.64 7,878.1 515.9 7,362.1 66,073 2.53 Jamaica 3,361 0.14 405.5 23.5 382.0 4,129 0.16 Japan c 192,977 7.82 23,279.8 1,585.3 21,694.5 193,745 7.41 Jordan 2,337 0.09 281.9 16.5 265.4 3,105 0.12 Kazakhstan 4,573 0.19 551.7 31.3 520.4 5,341 0.20 Kenya 3,435 0.14 414.4 21.1 393.2 4,203 0.16 Kiribati 680 0.03 82.0 1.9 80.1 1,448 0.06 Korea, Republic of c 40,627 1.65 4,901.0 318.0 4,583.0 41,395 1.58 Kosovo, Republic of 1,262 0.05 152.2 7.3 144.9 2,030 0.08 Kuwait 19,432 0.79 2,344.2 141.0 2,203.2 20,200 0.77 Kyrgyz Republic 1,107 0.04 133.5 5.7 127.9 1,875 0.07 Lao People's Democratic 272 0.01 32.8 2.2 30.6 1,040 0.04 Republic Latvia 1,808 0.07 218.1 11.4 206.7 2,576 0.10 Lebanon 1,062 0.04 128.1 6.3 121.8 1,830 0.07 Lesotho 945 0.04 114.0 3.8 110.2 1,713 0.07 Liberia 606 0.02 73.1 3.6 69.5 1,374 0.05 Libya 9,935 0.40 1,198.5 72.1 1,126.4 10,703 0.41 Lithuania 2,141 0.09 258.3 15.4 242.9 2,909 0.11 Luxembourg c 2,806 0.11 338.5 22.1 316.4 3,574 0.14 Madagascar 2,281 0.09 275.2 14.6 260.6 3,049 0.12 IBRD FINANCIAL STATEMENTS: JUNE 30, 2021 87 STATEMENT OF SUBSCRIPTIONS TO CAPITAL STOCK AND VOTING POWER (continued) June 30, 2021 Expressed in millions of U.S. dollars Subscriptions Voting Power Amounts Percentage Total amounts Amounts subject to call Number of Percentage of Member Shares of total b b paid in a,b a, b votes total b Malawi 1,722 0.07 % $ 207.7 $ 10.2 $ 197.5 2,490 0.10 % Malaysia 10,447 0.42 1,260.3 75.4 1,184.8 11,215 0.43 Maldives 469 0.02 56.6 0.9 55.7 1,237 0.05 Mali 2,035 0.08 245.5 14.1 231.4 2,803 0.11 Malta 1,361 0.06 164.2 7.5 156.7 2,129 0.08 Marshall Islands 469 0.02 56.6 0.9 55.7 1,237 0.05 Mauritania 1,308 0.05 157.8 6.1 151.7 2,076 0.08 Mauritius 1,614 0.07 194.7 9.9 184.8 2,382 0.09 Mexico 40,119 1.62 4,839.8 291.1 4,548.6 40,887 1.56 Micronesia, Federated States Of 479 0.02 57.8 1.0 56.8 1,247 0.05 Moldova 1,984 0.08 239.3 10.7 228.7 2,752 0.11 Mongolia 680 0.03 82.0 3.3 78.7 1,448 0.06 Montenegro 922 0.04 111.2 5.4 105.8 1,690 0.06 Morocco 7,546 0.31 910.3 58.9 851.4 8,314 0.32 Mozambique 1,332 0.05 160.7 6.8 153.9 2,100 0.08 Myanmar 3,465 0.14 418.0 21.4 396.6 4,233 0.16 Namibia 1,930 0.08 232.8 11.7 221.1 2,698 0.10 Nauru 586 0.02 70.7 2.4 68.3 1,354 0.05 Nepal 1,466 0.06 176.9 7.7 169.1 2,234 0.09 Netherlands c 50,798 2.06 6,128.0 421.1 5,707.0 51,566 1.97 New Zealand c 10,136 0.41 1,222.8 76.8 1,145.9 10,904 0.42 Nicaragua 873 0.04 105.3 3.4 101.9 1,641 0.06 Niger 1,233 0.05 148.7 5.6 143.1 2,001 0.08 Nigeria 19,417 0.79 2,342.4 168.0 2,174.3 20,185 0.77 North Macedonia 590 0.02 71.2 4.8 66.3 1,358 0.05 Norway c 15,080 0.61 1,819.2 121.2 1,698.0 15,848 0.61 Oman 1,978 0.08 238.6 12.1 226.5 2,746 0.11 Pakistan 12,487 0.51 1,506.4 96.1 1,410.2 13,255 0.51 Palau 16 * 1.9 0.2 1.8 784 0.03 Panama 891 0.04 107.5 6.9 100.6 1,659 0.06 Papua New Guinea 1,864 0.08 224.9 9.9 214.9 2,632 0.10 Paraguay 1,766 0.07 213.0 9.3 203.7 2,534 0.10 Peru 8,691 0.35 1,048.4 71.1 977.3 9,459 0.36 Philippines 9,903 0.40 1,194.6 71.0 1,123.6 10,671 0.41 Poland c 18,801 0.76 2,268.1 150.6 2,117.5 19,569 0.75 Portugal c 7,511 0.30 906.1 53.3 852.7 8,279 0.32 Qatar 1,389 0.06 167.6 11.1 156.5 2,157 0.08 Romania 7,201 0.29 868.7 56.5 812.2 7,969 0.30 Russian Federation 66,505 2.69 8,022.8 483.5 7,539.3 67,273 2.57 Rwanda 1,502 0.06 181.2 7.5 173.7 2,270 0.09 St. Kitts and Nevis 275 0.01 33.2 0.3 32.9 1,043 0.04 St. Lucia 699 0.03 84.3 2.6 81.7 1,467 0.06 St. Vincent and the Grenadines 387 0.02 46.7 1.6 45.1 1,155 0.04 Samoa 820 0.03 98.9 3.2 95.7 1,588 0.06 San Marino 595 0.02 71.8 2.5 69.3 1,363 0.05 Sao Tome and Principe 705 0.03 85.0 2.2 82.9 1,473 0.06 Saudi Arabia 66,505 2.69 8,022.8 484.6 7,538.2 67,273 2.57 Senegal 2,942 0.12 354.9 17.5 337.4 3,710 0.14 Serbia 3,710 0.15 447.6 28.9 418.7 4,478 0.17 Seychelles 263 0.01 31.7 0.2 31.6 1,031 0.04 88 IBRD FINANCIAL STATEMENTS: JUNE 30, 2021 STATEMENT OF SUBSCRIPTIONS TO CAPITAL STOCK AND VOTING POWER (continued) June 30, 2021 Expressed in millions of U.S. dollars Subscriptions Voting Power Percentage Amounts Amounts subject Number of Percentage Member Shares of total b Total amounts b paid in a,b to call a, b votes of total b Sierra Leone 1,043 0.04 % $ 125.8 $ 4.6 $ 121.2 1,811 0.07 % Singapore 6,595 0.27 795.6 55.9 739.7 7,363 0.28 Slovak Republic c 4,500 0.18 542.9 36.3 506.6 5,268 0.20 Slovenia c 1,905 0.08 229.8 15.9 213.9 2,673 0.10 Solomon Islands 729 0.03 87.9 2.3 85.6 1,497 0.06 Somalia 632 0.03 76.2 3.3 72.9 1,400 0.05 South Africa 18,243 0.74 2,200.7 134.7 2,066.0 19,011 0.73 South Sudan 1,437 0.06 173.4 8.6 164.8 2,205 0.08 Spain c 50,246 2.04 6,061.4 419.6 5,641.9 51,014 1.95 Sri Lanka 5,435 0.22 655.7 38.2 617.4 6,203 0.24 Sudan 1,989 0.08 239.9 15.5 224.5 2,757 0.11 Suriname 412 0.02 49.7 2.0 47.7 1,180 0.05 Sweden c 21,961 0.89 2,649.3 174.9 2,474.4 22,729 0.87 Switzerland c 36,951 1.50 4,457.6 293.2 4,164.4 37,719 1.44 Syrian Arab Republic 2,452 0.10 295.8 14.0 281.8 3,220 0.12 Tajikistan 1,204 0.05 145.2 5.3 139.9 1,972 0.08 Tanzania 1,295 0.05 156.2 10.0 146.2 2,063 0.08 Thailand 11,754 0.48 1,417.9 89.0 1,328.9 12,522 0.48 Timor-Leste 753 0.03 90.8 3.1 87.8 1,521 0.06 Togo 1,598 0.06 192.8 8.1 184.7 2,366 0.09 Tonga 766 0.03 92.4 3.1 89.3 1,534 0.06 Trinidad and Tobago 3,376 0.14 407.3 22.8 384.5 4,144 0.16 Tunisia 1,767 0.07 213.2 13.8 199.3 2,535 0.10 Turkey 28,181 1.14 3,399.6 204.5 3,195.1 28,949 1.11 Turkmenistan 627 0.03 75.6 3.6 72.0 1,395 0.05 Tuvalu 461 0.02 55.6 1.5 54.1 1,229 0.05 Uganda 1,005 0.04 121.2 7.8 113.4 1,773 0.07 Ukraine 13,910 0.56 1,678.0 100.5 1,577.5 14,678 0.56 United Arab Emirates 6,022 0.24 726.5 52.9 673.5 6,790 0.26 United Kingdom c 101,328 4.10 12,223.7 862.1 11,361.6 102,096 3.91 United States c 411,488 16.67 49,639.9 3,276.5 46,363.3 412,256 15.77 Uruguay 3,563 0.14 429.8 24.0 405.8 4,331 0.17 Uzbekistan 3,476 0.14 419.3 21.4 397.9 4,244 0.16 Vanuatu 765 0.03 92.3 3.1 89.2 1,533 0.06 Venezuela, Republica 20,361 0.82 2,456.2 150.8 2,305.5 21,129 0.81 Bolivariana de Vietnam 4,173 0.17 503.4 31.3 472.1 4,941 0.19 Yemen, Republic of 2,212 0.09 266.8 14.0 252.8 2,980 0.11 Zambia 3,878 0.16 467.8 25.9 441.9 4,646 0.18 Zimbabwe 3,575 0.14 431.3 22.4 408.9 4,343 0.17 Total - June 30, 2021 2,469,065 100 % $ 297,856 $ 19,244 $ 278,612 2,614,217 100 % Total - June 30, 2020 2,387,388 100 % $ 288,002 $ 18,034 $ 269,968 2,527,626 NOTES a. See Notes to Financial Statements, Note B—Capital Stock, Maintenance of Value, and Membership. b. May differ from the calculated figures or sum of individual figures shown due to rounding. c. A member of the Development Assistance Committee of the Organization for Economic Cooperation and Development (OECD). * Indicates amount less than $0.5 million or 0.005 percent The Notes to Financial Statements are an integral part of these Statements. IBRD FINANCIAL STATEMENTS: JUNE 30, 2021 89 NOTES TO FINANCIAL STATEMENTS PURPOSE AND AFFILIATED ORGANIZATIONS The International Bank for Reconstruction and Development (IBRD) is an international organization which commenced operations in 1946. The principal purpose of IBRD is to promote sustainable economic development and reduce poverty in its member countries, primarily by providing loans, guarantees and related technical assistance for specific projects and for programs of economic reform in developing member countries. The activities of IBRD are complemented by those of three affiliated organizations, the International Development Association (IDA), the International Finance Corporation (IFC), and the Multilateral Investment Guarantee Agency (MIGA). Each of these organizations is legally and financially independent from IBRD, with separate assets and liabilities, and IBRD is not liable for their respective obligations. Transactions with these affiliated organizations are disclosed in the notes that follow. IBRD is immune from taxation pursuant to Article VII, Section 9, Immunities from Taxation, of IBRD’s Articles of Agreement. NOTE A—SUMMARY OF SIGNIFICANT ACCOUNTING AND RELATED POLICIES IBRD’s financial statements are prepared in conformity with accounting principles generally accepted in the United States of America (U.S. GAAP). The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Due to the inherent uncertainty involved in making these estimates, actual results could differ from these estimates. Significant judgment has been used in the valuation of certain financial instruments, the determination of the adequacy of the accumulated provisions for losses on loans and other exposures, the determination of net periodic cost from pension and other postretirement benefits plans, and the present value of projected benefit obligations. On August 5, 2021, the Executive Directors approved these financial statements for issue. Certain reclassifications of the prior year’s information have been made to conform with the current year’s presentation. Translation of Currencies: IBRD’s financial statements are expressed in terms of U.S. dollars for the purpose of summarizing IBRD’s financial position and the results of its operations. IBRD’s functional currencies are the U.S. dollar and euro. Assets and liabilities are translated at market exchange rates in effect at the end of the reporting period. Revenue and expenses are translated at either the market exchange rates in effect on the dates on which they are recognized or at an average of the market exchange rates in effect during each month. Translation adjustments relating to non-functional currencies are reflected in the Statement of Income, while translation adjustments for assets and liabilities denominated in euro are reflected in the Statement of Comprehensive Income. Valuation of Capital Stock: In the Articles of Agreement, the capital stock of IBRD is expressed in terms of “U.S. dollars of the weight and fineness in effect on July 1, 1944” (“1944 dollars”). Following the abolition of gold as a common denominator of the monetary system and the repeal of the provision of the U.S. law defining the par value of the U.S. dollar in terms of gold, the pre-existing basis for translating 1944 dollars into current dollars or into any other currency was eliminated. The Executive Directors of IBRD have decided, until such time as the relevant provisions of the Articles of Agreement are amended, that the words “U.S. dollars of the weight and fineness in effect on July 1, 1944” in Article II, Section 2(a) of the Articles of Agreement of IBRD are interpreted to mean the Special Drawing Right (SDR) introduced by the International Monetary Fund, as valued in terms of U.S. dollars immediately before the introduction of the basket method of valuing the SDR on July 1, 1974, such value being $1.20635 for one SDR (“1974 SDR”). Maintenance of Value: Article II, Section 9 of the Articles of Agreement provides for maintenance of value (MOV), at the time of subscription, of national currencies paid-in, which are subject to certain restrictions. MOV is determined by measuring the foreign exchange value of a member’s national currency against the standard of value of IBRD’s capital based on the 1974 SDR. MOV receivable relates to amounts due from members on account of movements in exchange rates from the date of initial subscription, resulting in the reduction in the value of their paid-in capital denominated in national currencies. Members are required to make payments to IBRD if their currencies depreciate significantly relative to the standard of value. These amounts may be settled either in cash or a non-negotiable, non-interest bearing note, which is due on demand. Certain notes are due on demand only after IBRD's callable subscribed capital has been entirely called pursuant to Article IV, Section 2 (a) of the Articles of Agreement. Furthermore, the Executive Directors have adopted a policy of reimbursing members whose national currencies appreciate significantly in terms of the standard of value. 90 IBRD FINANCIAL STATEMENTS: JUNE 30, 2021 MOV is deferred when the restriction of national currencies paid-in is lifted and these currencies are being used in IBRD’s operations and/or are being invested, swapped, or loaned to members by IBRD or through IFC. Once these restricted currencies are no longer being used in operations, the related MOV is no longer deferred, but rather, becomes due on the same terms as other MOV obligations. All MOV receivable balances are shown as components of Equity, under Receivable amounts to maintain value of currency holdings. All MOV payable balances are included in Other liabilities-Accounts payable and miscellaneous liabilities on the Balance Sheet. The net receivable or payable MOV amounts relating to national currencies used in IBRD's lending and investing operations are also included as a component of Equity under Deferred amounts to maintain value of currency holdings. Withdrawal of Membership: Under IBRD’s Articles of Agreement, in the event a member withdraws from IBRD, the withdrawing member is entitled to receive the value of its shares payable to the extent the member does not have any outstanding obligations to IBRD. IBRD’s Articles of Agreement also state that the former member has continuing obligations to IBRD after withdrawal. Specifically, the former member remains fully liable for its entire capital subscription, including both the previously paid-in portion and the callable portion, so long as any part of the loans or guarantees contracted before it ceased to be a member are outstanding. Transfers Approved by the Board of Governors: In accordance with IBRD’s Articles of Agreement, as interpreted by the Executive Directors, the Board of Governors may exercise its reserved power to approve transfers to other entities for development purposes. When unconditional, these transfers, which are included in the Board of Governors-approved and other transfers line in the Statement of Income, are reported as expenses upon approval. If conditional, these transfers are expensed when the conditions specified for the use by the beneficiaries have been met. The transfers are funded from the immediately preceding fiscal year’s Net Income, Surplus, Restricted Retained Earnings or Other Reserves. Retained Earnings: Retained Earnings consist of allocated amounts (Special Reserve, General Reserve, Pension Reserve, Surplus, Cumulative Fair Value Adjustments, Restricted Retained Earnings, Other Reserves) and Unallocated Net Income (Loss). The Special Reserve consists of loan commissions set aside pursuant to Article IV, Section 6 of the Articles of Agreement, which are to be held in liquid assets. These assets may be used only for the purpose of meeting liabilities of IBRD on its borrowings and guarantees in the event of defaults on loans made, participated in, or guaranteed by IBRD. The Special Reserve assets are included under Investments-Trading, and comprise obligations of the United States Government, its agencies, and other official entities. The allocation of such commissions to the Special Reserve was discontinued in 1964 with respect to subsequent loans and no further additions are being made to it. The General Reserve consists of earnings from prior fiscal years which, in the judgment of the Executive Directors, should be retained in IBRD’s operations. The Pension Reserve consists of the difference between the cumulative actual funding of the Staff Retirement Plan and Trust (SRP) and other postretirement benefits plans, and the cumulative accounting income or expense for these plans, from prior fiscal years. This reserve is reduced when pension accounting expenses exceed the actual funding of these plans. In addition, the Pension Reserve also includes investment revenue earned on the Post-Employment Benefits Plan (PEBP) portfolio as well as Post Retirement Contribution Reserve Fund (PCRF), which is used to stabilize IBRD’s contributions to the pension plan. Surplus consists of earnings from prior fiscal years which are retained by IBRD until a further decision is made on their disposition. Cumulative Fair Value Adjustments consist of the cumulative effect of the adoption of the Financial Accounting Standards Board’s (FASB’s) fair value guidance relating to prior fiscal years, the reclassification and amortization of the transition adjustments, and the unrealized gains or losses on non-trading portfolios. Restricted Retained Earnings consists of contributions or revenue from prior years which are contractually restricted as to their purpose. Unallocated Net Income (Loss) consists of the current fiscal year’s net income (loss) adjusted for Board of Governors- approved and other transfers made during the year. Other Reserves consist of allocations from Surplus and non-functional currency translation adjustment gains/losses from prior fiscal years. Allocations from Surplus are retained by IBRD until the conditions specified for the use by the beneficiaries have been met. Loans and Other Exposures: All of IBRD’s loans are made to or guaranteed by countries that are members of IBRD, except for loans made to IFC. The majority of IBRD’s loans have repayment obligations based on specific currencies. IBRD FINANCIAL STATEMENTS: JUNE 30, 2021 91 IBRD also holds multicurrency loans which have repayment obligations in various currencies determined on the basis of a currency pooling system. Other exposures comprise signed commitments (including deferred drawdown options (DDOs) that are effective, and irrevocable commitments), exposures to member countries’ derivatives and guarantees. Loans are carried at amortized cost. Commitment charges on the undisbursed balance of loans are recognized in revenue as earned. Any loan origination fees incorporated in the terms of a loan are deferred and recognized over the life of the loan as an adjustment of the yield. The unamortized balance of loan origination fees is included as a reduction of the Loans outstanding on the Balance Sheet, and the loan origination fee amortization is included in Interest revenue from Loans, net in the Statement of Income. Accrued interest is presented in the balance sheet line item Other receivables - Accrued income on loans. It is IBRD’s practice not to reschedule interest or principal payments on its loans or participate in debt rescheduling agreements with respect to its loans. Should modifications be made to the terms of existing loans, IBRD would perform an evaluation to determine the required accounting treatment, including whether the modification would result in the affected loans being accounted for as trouble debt restructuring, new loan, or as a continuation of the existing loan. It is the policy of IBRD to place into nonaccrual status all loans and other exposures (exposures) made to or guaranteed by a member of IBRD if principal, interest, or other charges with respect to any such exposures are overdue by more than six months, unless IBRD’s management determines that the overdue amount will be collected in the immediate future. In addition, if loans and other exposures made by IDA to a member government are placed in nonaccrual status, all loans and other exposures made to, or guaranteed by, that member government will also be placed in nonaccrual status by IBRD. On the date a member’s exposures are placed into nonaccrual status, unpaid interest and other charges accrued on exposures to the member are deducted from the revenue of the current period per IBRD’s policy. Interest and other charges on nonaccruing exposures are included in revenue only to the extent that payments have been received by IBRD. If collectability risk is considered to be particularly high at the time of arrears clearance, the member’s exposures may not automatically emerge from nonaccrual status. In such instances, a decision on the restoration of accrual status is made on a case-by-case basis and in certain cases that decision may be deferred until a suitable period of payment performance has passed. Loan Commitments: Undisbursed loans relate to operations approved by the Executive Directors, for which disbursements are yet to be made. IBRD records a provision for expected losses on undisbursed loan commitments including Deferred Drawdown Options (DDOs), when signed by both parties. The signature of the loan agreement is a binding event that prevents IBRD from unconditionally withdrawing from the agreement. Guarantees: Financial guarantees are commitments issued by IBRD to guarantee payment by a member country (the debtor) to a third party in the event that a member government (or a government-owned entity) fails to perform its contractual obligations to a third party. Guarantees are regarded as outstanding when the underlying financial obligation of the debtor is incurred, and called when a guaranteed party demands payment under the guarantee. IBRD would be required to perform under its guarantees if the payments guaranteed were not made by the debtor and the guaranteed party called the guarantee by demanding payment from IBRD in accordance with the terms of the guarantee. In the event that a guarantee of a member country is called, IBRD has the contractual right to require payment from the member country. IBRD records the fair value of the obligation to stand ready in Other Liabilities - Accounts payable and miscellaneous liabilities, and a corresponding fees receivable asset in the Other Receivables - Accrued income on loans line on IBRD’s Balance Sheet. Upfront guarantee fees received are deferred and amortized over the life of the guarantee. Accumulated Provision for Losses on Loans and Other Exposures: Management determines the appropriate level of accumulated provisions for losses on exposures, which reflects the expected losses inherent in IBRD’s exposures. Loans Loan exposures are disaggregated into two groups: exposures in accrual status and exposures in nonaccrual status. In each group, a credit risk rating is then assigned to exposures for each borrower. The total exposure for provisioning is the current exposure and the estimated future exposure, taking into account expected disbursements and repayments over the life of the instruments. The expected credit losses related to loans and other exposures are calculated over the life of the instruments based on the annual estimated exposures, the expected default frequency (probability of default to IBRD) and the estimated loss given default. The provision for expected losses is the sum of the expected annual losses over the life of the instruments. For countries in accrual status, these exposures are grouped in pools of borrowers with a similar risk rating. The determination of a borrower’s ratings is based on various factors (see Note D—Loans and other exposures). Each risk 92 IBRD FINANCIAL STATEMENTS: JUNE 30, 2021 rating is mapped to an expected default frequency using IBRD's credit migration matrix, based on historical observations of credit ratings at the beginning and at the end of each year. Expected losses on loan exposures comprise estimates of potential losses arising from the economic loss due to delays in receiving payments. The estimated loss given default is determined at each balance sheet date, based on IBRD’s historical experience, as well as parameters adjusted for current conditions during the reasonable and supportable forecast period of IBRD. The loss given default is based on the borrower’s eligibility, namely: IBRD, Blend (IBRD and IDA) and IDA, with the highest loss given default associated with IDA eligibility. The borrower’s eligibility is assessed at least annually. The main factors used to determine the loss given default are the estimated length of delays in receiving loan payments, and the effective interest rate of the exposure. As the majority of IBRD’s loans carry a variable interest rate, the loss severity is impacted by the changes in forward looking market interest rates. For the calculation of expected credit losses, IBRD applies a three-year reasonable and supportable forecast period, representing the most reliable and available economic data during this period. IBRD also applies a ten-year straight-line reversion to the mean to reflect the historical pattern of rating migration to the mean of its loan portfolio. This methodology is also applied to countries with exposures in nonaccrual status, although the expected default frequency is equal to one. At times, to reflect certain distinguishing circumstances of a particular nonaccrual situation, different input assumptions may be used for a specific country. All exposures for countries in nonaccrual status are individually assessed. It is IBRD’s practice not to write off loans. All contractual obligations associated with exposures in nonaccrual status have eventually been cleared, and borrowers have emerged from nonaccrual status. To date, no loans have been written off. Management reassesses the adequacy of the accumulated provision on a quarterly basis and adjustments to the accumulated provision are recorded as a charge to or release of provision in the Statement of Income. In addition, reasonableness of the inputs used is reassessed at least annually. When IBRD receives a third-party guarantee in the form of a credit enhancement that is embedded in the loan agreement with the borrower, it considers the benefit of the credit enhancement in the loan loss provisioning credit risk assessment. Loan Commitments IBRD records the expected credit losses on loan commitments based on the projected disbursements of signed loan commitments (adjusted by cancellations based on historical experience), the probability of default and loss given default. The provision is included in Other liabilities - Accounts payable and miscellaneous liabilities on the Balance Sheet. Guarantees IBRD records a contingent liability for the expected losses related to guarantees over the projected life of the instruments, which is determined based on the estimated exposure at default, multiplied by the corresponding loss given default and expected default probability for the projected life of the guarantee. This provision, as well as the unamortized balance of the deferred guarantee fees, and the unamortized balance of the obligation to stand ready, are included in Other Liabilities - Accounts payable and miscellaneous liabilities on the Balance Sheet. Exposure Exchange Agreements (EEAs) IBRD executes EEAs with various organizations. While these agreements are not legally considered guarantees, in IBRD’s financial statements they are recognized as financial guarantees as they meet the accounting criteria for financial guarantees. Under an EEA, each party exchanges credit risk exposure of a portfolio supported by underlying loans to borrowers, by providing and receiving guarantees from each other, for the amounts specified. The guarantee provided and the guarantee received are two separate transactions; namely (a) the provision of a financial guarantee, and (b) the receipt of an asset. There is generally no exchange of cash between the organizations for these transactions. For a guarantee provided under an EEA, IBRD records a liability equivalent to the fair value of the obligation to stand ready. This liability is included in Other liabilities - Accounts payable and miscellaneous liabilities on the Balance Sheet and is amortized over the life of the EEA. IBRD also records a liability, and corresponding expense, in recognition of the risk coverage provided (provision). The value of this liability reflects the credit quality of the underlying loans in the portfolio and changes over the life of the EEA as the credit quality of these loans changes. For a guarantee received under an EEA, IBRD records an asset equivalent to the fair value of the right to be indemnified. This asset is included in Other assets – Miscellaneous on the Balance Sheet and is amortized over the life of the EEA. IBRD also records an asset, and corresponding income, in recognition of the risk coverage received (recoverable asset). The value of this asset reflects the credit quality of the underlying loans in the portfolio and changes over the life of the EEA contract as the credit quality of these loans changes. IBRD FINANCIAL STATEMENTS: JUNE 30, 2021 93 Segment Reporting: Based on an evaluation of IBRD’s operations, Management has determined that IBRD has only one reportable segment since financial results are reviewed and resource allocation decisions are made at the entity level. Statement of Cash Flows: For the purpose of IBRD's Statement of Cash Flows, cash is defined as the amount of Unrestricted cash and Restricted cash under the Due from banks line on the Balance Sheet. Restricted Cash: This includes amounts which have been received from members as part of their capital subscriptions, as well as from donors and other sources, which are restricted for specified purposes. For capital subscriptions, a portion of these subscriptions have been paid to IBRD in the national currencies of the members. These amounts are usable by IBRD in its lending and investing operations, only with the consent of the respective members, and for administrative expenses incurred in national currencies. Investments: Investment securities are classified based on Management’s intention on the date of purchase, their nature, and IBRD’s policies governing the level and use of such investments. As of June 30, 2021, all of the financial instruments in IBRD’s investment portfolio were classified as trading. These securities are carried and reported at fair value, or at face value or net asset value (NAV), which approximate fair value. Where available, quoted market prices are used to determine the fair value of trading securities. These include most government and agency securities, futures contracts, exchange-traded equity securities, Asset-backed Securities (ABS), Mortgage-backed Securities (MBS) and To-Be-Announced (TBA) securities. For instruments for which market quotations are not available, fair values are determined using model-based valuation techniques, whether internally-generated or vendor-supplied, that include the discounted cash flow method using observable market inputs such as yield curves, credit spreads, and conditional prepayment rates. Where applicable, unobservable inputs such as conditional prepayment rates, probability of default and loss severity are used. Unless quoted prices are available, time deposits are reported at face value which approximates fair value, as they are short term in nature. The first-in first-out method is used to determine the cost of securities sold in computing the realized gains and losses on these instruments. Derivative instruments used in liquidity management are not designated as hedging instruments for accounting purposes. Interest revenue is included in the Investments-Trading, net line in the Statement of Income. Unrealized gains and losses for investment securities and related financial instruments held in the trading portfolio are included in the Unrealized mark-to-market gains (losses) on Investments-Trading portfolio, net line in the Statement of Income. Realized gains and losses on trading securities are recognized in the Statement of Income when securities are sold. IBRD may require collateral in the form of approved liquid securities from individual counterparties or cash, under legal agreements that provide for collateralization, in order to mitigate its credit exposure to these counterparties. For collateral received in the form of cash from counterparties, IBRD invests the amounts received and records the investment and a corresponding obligation to return the cash. Collateral received in the form of liquid securities is only recorded on IBRD's Balance Sheet to the extent that it has been transferred under securities lending agreements in return for cash. Securities Purchased Under Resale Agreements, Securities Lent Under Securities Lending Agreements and Securities Sold Under Repurchase Agreements and Payable for Cash Collateral Received: Securities purchased under resale agreements, securities lent under securities lending agreements, securities sold under repurchase agreements and payable for cash collateral received are reported at face value which approximates fair value, as they are short term in nature. IBRD receives securities purchased under resale agreements, monitors the fair value of the securities and, if necessary, closes out transactions and enters into new repriced transactions. The securities transferred to counterparties under repurchase and security lending arrangements and the securities transferred to IBRD under resale agreements have not met the accounting criteria for treatment as a sale. Therefore, securities transferred under repurchase agreements and security lending arrangements are retained as assets on the Balance Sheet, and securities received under resale agreements are not recorded on the Balance Sheet. Securities lent under securities lending agreements and sold under securities repurchase agreements as well as securities purchased under resale agreements are presented on a gross basis which is consistent with the manner in which these instruments are settled. The interest earned from securities purchased under resale agreements is included in Investments–Trading, net in the Statement of Income. The interest expense pertaining to the securities sold under repurchase agreements and security lending arrangements, is included in the Borrowing expenses, net line in the Statement of Income. Nonnegotiable, Noninterest-bearing Demand Obligations on Account of Subscribed Capital: All demand obligations are held in bank accounts which bear IBRD’s name and are carried and reported at face value as a reduction to equity. Payments on some of these instruments are due to IBRD upon demand. Others are due to IBRD on demand, but only after the IBRD’s callable subscribed capital has been entirely called pursuant to Article IV, Section 2 (a) of the Articles of Agreement. 94 IBRD FINANCIAL STATEMENTS: JUNE 30, 2021 Premises and Equipment: Premises and equipment, including leasehold improvements, and information technology assets are carried at cost less accumulated depreciation and amortization. IBRD computes depreciation and amortization using the straight-line method over the estimated useful lives of the owned assets, which range between two and fifty years. For leasehold improvements, depreciation is computed over the lesser of the remaining term of the leased facility or the estimated economic life of the improvement. Maintenance and repairs are charged to expense as incurred, while major improvements are capitalized and amortized over the estimated useful life. Lessee Arrangements: IBRD’s lessee arrangements are mostly real estate operating leases. Under these arrangements, IBRD records right-of-use assets and lease liabilities at lease commencement. Right-of-use assets are reported in Other assets - Premises and equipment, net and the related lease liabilities are reported in Other liabilities - Accounts payable and miscellaneous liabilities. IBRD has elected to account for the lease and non-lease components together as a single lease component. At lease commencement, lease liabilities are recognized based on the present value of the remaining lease payments and discounted using IBRD’s incremental borrowing rate. All leases are recorded on the Balance Sheet except short-term leases with an initial term of 12 months or less. Lease expense, including that for short-term leases, is recognized on a straight-line basis over the lease term and is recorded in Administrative expenses in the Statement of Income. Borrowings: To ensure funds are available for lending and liquidity purposes, IBRD borrows in the international capital markets, offering its securities (discount notes, vanilla and structured bonds) to private and governmental buyers. IBRD issues debt instruments of varying maturities denominated in various currencies with both fixed and variable interest rates. IBRD has elected the fair value option for all borrowings. All changes in fair value are recognized in the related Unrealized mark-to-market gains and losses on non-trading portfolios, net, line in the Statement of Income, except for changes in the fair value related to IBRD’s own credit risk, which are reported in Other Comprehensive Income (OCI) as a Debit Valuation Adjustment (DVA). The DVA on fair value option elected liabilities is measured by revaluing each liability to determine the changes in fair value of that liability arising from changes in IBRD’s cost of funding relative to LIBOR (the London inter-bank offered rate). Structured bonds issued by IBRD have coupon or repayment terms linked to the level or the performance of interest rates, foreign exchange rates, equity indices, catastrophic events or commodities. For the purpose of the Statement of Cash Flows, the short-term borrowings, if any, which have original maturities less than 90 days, are presented on a net basis. By contrast, short-term borrowings with original maturities greater than 90 days and up to one year are presented on a gross basis. Interest expense relating to all debt instruments in IBRD’s borrowing portfolio is measured on an effective yield basis and is reported as part of Borrowing expenses, net in the Statement of Income. Amortization of discounts and premiums is recorded using the effective interest method and it is included in the Borrowing expenses, net line in the Statement of Income. Accounting for Derivatives: IBRD has elected not to designate any hedging relationships for accounting purposes. Rather, all derivative instruments are reported at fair value on the Balance Sheet, with changes in fair values accounted for through the Statement of Income. The presentation of derivative instruments on IBRD’s Balance Sheet reflects the netting of derivative asset and liability positions and the related cash collateral received from the counterparty, when a legally enforceable master netting agreement exists, and the other conditions set out in ASC Topic 210-20, Balance Sheet—Offsetting, are met. In addition, in the Notes to the financial statements, unless stated differently, derivatives are presented on a net basis by instrument. A master netting agreement is an industry standard agreement with a counterparty that permits multiple transactions governed by that agreement to be terminated or accelerated and settled through a single payment in a single currency in the event of a default (e.g., bankruptcy, failure to make a required payment or transfer security or deliver collateral when due). Obligations under master netting agreements are often secured by collateral posted under an industry standard credit support annex to the master netting agreement. Upon default by the counterparty, the collateral agreement grants an entity the right to set-off any amounts payable by the counterparty against any posted collateral. IBRD uses derivative instruments in its investment trading portfolio to manage interest rate and currency risks. These derivatives are carried and reported at fair value. Interest revenue/expenses are reflected as part of Interest revenue, while unrealized mark-to-market gains and losses on these derivatives are reflected as part of the Unrealized mark-to-market gains (losses) in Investments-Trading, net line in the Statement of Income. IBRD FINANCIAL STATEMENTS: JUNE 30, 2021 95 IBRD also uses derivatives in its loan, borrowing and asset/liability management activities. It also offers derivative intermediation services to clients. In the loan and borrowing portfolios, derivatives are used to modify the interest rate and/or currency characteristics of these portfolios. The interest component of these derivatives is recognized as an adjustment to the related loan revenue and borrowing costs over the life of the derivative contracts and is included in the related Interest revenue/expenses lines in the Statement of Income. Changes in fair values of these derivatives are accounted for through the Statement of Income as Unrealized mark-to-market gains and losses in non-trading portfolios, net. For the purpose of the Statement of Cash Flows, IBRD has elected to report the cash flows associated with the derivative instruments that are used to economically hedge its loans, investments and borrowings, in a manner consistent with the presentation of the related loan, investment and borrowing cash flows. Derivative contracts include currency forward contracts, TBA securities, swaptions, exchange traded options and futures contracts, currency swaps and interest rate swaps. Currency swaps and interest rate swaps are either plain vanilla or structured. Currency forward contracts and plain vanilla currency and interest rate swaps are valued using the discounted cash flow methods using observable market inputs such as yield curves, foreign exchange rates, basis spreads and funding spreads. For structured currency and interest rate swaps, which primarily consist of callable swaps linked to interest rates, foreign exchange rates, and equity indices, valuation models and inputs similar to the ones applicable to structured bond valuations are used. Where applicable, the models also incorporate significant unobservable inputs such as correlations and long-dated interest rate volatilities. Most outstanding derivative positions are transacted over-the-counter and therefore valued using internally developed valuation models. For commercial and non-commercial counterparties where IBRD has a net receivable position, IBRD calculates a Credit Valuation Adjustment (CVA) to reflect credit risk. For net derivative positions with commercial and non-commercial counterparties where IBRD is in a net payable position, IBRD calculates a DVA to reflect its own credit risk. The CVA is calculated using the fair value of the derivative contracts, net of collateral received under credit support agreements, and the probability of counterparty default based on the CDS spread and, where applicable, proxy CDS spreads. The DVA calculation is generally consistent with the CVA methodology and incorporates IBRD’s own credit spread as observed through the CDS market. Valuation of Financial Instruments: IBRD has an established and documented process for determining fair values. Fair value is based upon quoted market prices for the same or similar securities, where available. Financial instruments for which quoted market prices are not readily available are valued based on discounted cash flow models and other established valuation models. These models primarily use market-based or independently-sourced market parameters such as yield curves, interest rates, volatilities, foreign exchange rates and credit curves, and may incorporate unobservable inputs, some of which may be significant. Selection of these inputs may involve some judgment. In instances where Management relies on instrument valuations supplied by external pricing vendors, there are procedures in place to validate the appropriateness of the models used as well as inputs applied in determining those values. The fair value of certain instruments is calculated using NAV as a practical expedient. To ensure that the valuations are appropriate where internally-developed models are used, IBRD has various controls in place, which include both internal and periodic external verification and review. As of June 30, 2021, and June 30, 2020, IBRD had no financial assets or liabilities measured at fair value on a non-recurring basis. Fair Value Hierarchy: Financial instruments are categorized based on the priority of the inputs to the valuation technique. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1), the next highest priority to observable market-based inputs or inputs that are corroborated by market data (Level 2) and the lowest priority to unobservable inputs that are not corroborated by market data (Level 3). Financial assets and liabilities recorded at fair value on the Balance Sheet are categorized based on the inputs to the valuation techniques as follows: Level 1: Financial assets and liabilities whose values are based on unadjusted quoted prices for identical assets or liabilities in active markets. Level 2: Financial assets and liabilities whose values are based on quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; or pricing models for which all significant inputs are observable, either directly or indirectly for substantially the full term of the asset or liability. Level 3: Financial assets and liabilities whose values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. IBRD’s policy is to recognize transfers in and transfers out of levels as of the end of the reporting period in which they occur. 96 IBRD FINANCIAL STATEMENTS: JUNE 30, 2021 Investments measured at NAV (or its equivalent) are not classified in the fair value hierarchy. Accounting for Grant Expenses: IBRD recognizes an expense for unconditional grants, such as Contributions to Special Programs and most Board of Governors-approved and other transfers, upon approval. IBRD recognizes an expense for conditional grants when the conditions specified for use by the beneficiaries have been met. Trust Funds: To the extent that IBRD acts as an agent for, or controls IBRD-executed trust funds, assets held on behalf of specified beneficiaries are recorded on IBRD’s Balance Sheet, along with corresponding liabilities. Amounts disbursed from these trust funds are recorded as expenses with corresponding amounts recognized as revenues. For Recipient- executed trust funds, since IBRD acts as a trustee, no assets or liabilities relating to these activities are recorded on the Balance Sheet. In some trust funds, execution is split between Recipient-executed and IBRD-executed portions. Decisions on assignment of funding resources between the two types of execution may be made on an ongoing basis, therefore, the execution of a portion of these available resources may not yet be assigned. IBRD also acts as a financial intermediary to provide specific administrative or financial services with a limited fiduciary or operational role. These arrangements, referred to as Financial Intermediary Funds, include, for example, administration of debt service trust funds, financial intermediation and other more specialized limited fund management roles. For these arrangements, funds are held and disbursed in accordance with instructions from donors or, in some cases, an external governance structure or a body operating on behalf of donors. For Financial Intermediary Funds, since IBRD acts as a trustee, no assets or liabilities relating to these activities are recorded on the Balance Sheet. Accounting and Reporting Developments Accounting standards evaluated: In January 2021, the FASB issued ASU 2021-01 - Reference Rate Reform (Topic 848): Scope. The ASU permits entities to elect certain optional expedients and exceptions when accounting for derivative contracts affected by certain changes in the interest rates used in computations affected by reference rate reform activities. IBRD adopted the standard prospectively effective March 31, 2021, as permitted by the ASU, and the adoption did not have a material impact on the financial statements. In March 2020, the FASB issued ASU 2020-04 - Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting . The ASU provides temporary optional expedients and exceptions to the US GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burden of the expected market transition from LIBOR and other interbank offered rates. To be eligible for the optional expedients, modifications of contractual terms that change (or have the potential to change) the amount or timing of contractual cash flows must be related to replacement of a reference rate. The relief is temporary and is only available through December 31, 2022. IBRD will apply the standard consistently to contractual amendments made to all applicable floating rate instruments indexed to IBOR (inter-bank offered rate) rates. IBRD adopted the standard effective June 30, 2020 and the adoption did not have a material impact on the financial statements. In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820) – Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement, which amends certain disclosure requirements of ASC 820. The guidance became effective for IBRD on July 1, 2020. The adoption of this ASU had no material impact on IBRD’s financial statements. In August 2018, the FASB issued ASU 2018-15, Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350- 40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, which amends ASC 350-40. The guidance became effective for IBRD on July 1, 2020. The adoption of this ASU had no material impact on IBRD’s financial statements. In August 2018, the FASB issued ASU 2018-14, Compensation – Retirement Benefits – Defined Benefit Plans – General (Subtopic 715-20): Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans, which amends ASC 715 disclosure requirements related to defined benefit pension and other postretirement plans for annual periods. The guidance became effective for IBRD for the annual financial statements for the fiscal year ending June 30, 2021. The adoption of this ASU had no material impact on IBRD’s financial statements. In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (CECL ASU). The ASU and its subsequent amendments introduce a new model for the accounting of credit losses on loans and other financial assets measured at amortized cost. The CECL model, requires an entity to estimate the credit losses expected over the life of an exposure, considering historical information, current information, and reasonable and supportable forecasts. Additionally, the ASUs require enhanced disclosures about credit quality and significant estimates and judgments used in estimating credit losses. IBRD FINANCIAL STATEMENTS: JUNE 30, 2021 97 For IBRD, the ASUs became effective on July 1, 2020. The transition adjustment increased retained earnings by $203 million, which reflects the decrease in the expected credit losses relating to loans and other exposures under CECL compared to the previous “incurred loss” model. The impact is mainly driven by the use of implied forward interest rates under CECL compared to historical average interest rates under the previous methodology. Implied forward interest rates declined to historically low levels in the context of the global pandemic. This impact was partially offset by the inclusion of signed loan commitments in the determination of the provision and the requirement to provision over the full life of IBRD’s long maturity profile credit exposures. See the table below for details of the CECL transition adjustment as of July 1, 2020. The transition adjustment had no impact on the Statement of Income. See Note D — Loans and Other Exposures and Note G — Retained Earnings, Allocations and Transfers, for additional details. Impact of the Location on the Balance June 30, 2020 As adoption of the July 1, 2020 Sheet reported CECL ASU Adjusted Accumulated provision related to: Loans outstanding Accumulated provision for loan losses $ 1,599 $ (465) $ 1,134 Signed loan commitments Other liabilities - 298 298 Other exposures Other liabilities 99 (47) 52 Total impact on accumulated provision $ 1,698 $ (214) $ 1,484 Recoverable asset relating to guarantees received under EEAs Other assets $ (28) $ 11 $ (17) Retained earnings $ 28,765 $ 203 $ 28,968 NOTE B—CAPITAL STOCK, MAINTENANCE OF VALUE, AND MEMBERSHIP The following table provides a summary of the changes in IBRD's authorized and subscribed shares: Table B1: IBRD’s shares Authorized shares Subscribed shares As of June 30, 2019 2,783,873 2,320,659 General Capital Increase/Selective Capital Increase (GCI/SCI) - 66,729 As of June 30, 2020 2,783,873 2,387,388 GCI/SCI - 81,677 As of June 30, 2021 2,783,873 2,469,065 The following table provides a summary of the changes in subscribed capital, uncalled portion of subscriptions, and paid- in capital: Table B2: IBRD’s capital In millions of U.S. dollars Uncalled portion Subscribed capital of subscriptions Paid-in capital As of June 30, 2019 $ 279,953 $ (262,892) $ 17,061 GCI/SCI 8,049 (7,076) 973 As of June 30, 2020 288,002 (269,968) 18,034 GCI/SCI 9,854 (8,644) 1,210 As of June 30, 2021 $ 297,856 $ (278,612) $ 19,244 The uncalled portion of subscriptions is subject to call only when required to meet the obligations incurred by IBRD as a result of borrowings or guaranteeing loans. On October 1, 2018, IBRD’s Board of Governors approved two resolutions that increased IBRD’s authorized capital. The total increase in authorized capital was $57.5 billion, of which, $27.8 billion and $29.7 billion relate to the GCI and SCI, respectively. Under the terms of the 2018 GCI and SCI, paid-in capital is expected to increase by up to $7.5 billion. As of June 30, 2021, the cumulative subscription payments received under the 2018 capital increases was $2.8 billion. 98 IBRD FINANCIAL STATEMENTS: JUNE 30, 2021 Amounts to Maintain the Value of Currency Holdings The following table summarizes the amounts to MOV classified as components of equity: Table B3: MOV balances In millions of U.S. dollars June 30, 2021 June 30, 2020 MOV receivable $ (343) $ (299) Net Deferred MOV payable 197 116 Deferred demand obligations (130) (130) Deferred MOV payable/(receivable) $ 67 $ (14) NOTE C—INVESTMENTS As of June 30, 2021, IBRD’s investments include the liquid asset portfolio, the Post Employment Benefit Plan (PEBP), the Post Retirement Contribution Reserve Fund (PCRF), holdings relating to the Advance Market Commitment for Pneumococcal Vaccines Initiative (AMC) and the Local Currency Market Development (LCMD) investments. LCMD investments are sovereign bonds denominated in the local currencies of less developed markets, and funded by borrowings in the same currency with matching volume, payment and maturity characteristics. Investments held by IBRD are designated as trading and reported at fair value, or at face value, which approximates fair value. As of June 30, 2021, Investments were primarily comprised of government and agency obligations, and time deposits (56% and 40% respectively), with all the instruments being classified as Level 1 or Level 2 within the fair value hierarchy. As of June 30, 2021, the largest holdings of investments from a single counterparty were Japanese Government instruments (11%) and U.S. Treasuries (9%). A summary of IBRD’s Investments-Trading is as follows: Table C1: Investments – Trading composition In millions of U.S. dollars June 30, 2021 June 30, 2020 Government and agency obligations $ 48,630 $ 48,449 Time deposits 35,460 30,982 Asset-backed Securities (ABS) 1,710 3,012 Alternative investments a 1,352 942 Equity securities a 414 382 Total Investments - Trading $ 87,566 $ 83,767 a. Related to PEBP holdings. Alternative investments are comprised of investments in hedge funds, private equity funds, private credit funds and real estate funds, at net asset value (NAV). IBRD FINANCIAL STATEMENTS: JUNE 30, 2021 99 IBRD manages its investments on a net portfolio basis. The following table summarizes IBRD’s net portfolio position: Table C2: Net investment portfolio position In millions of U.S. dollars June 30, 2021 June 30, 2020 Investments-Trading $ 87,566 $ 83,767 Securities purchased under resale agreements 338 394 Securities sold under repurchase agreements, securities lent under securities lending agreements, and payable for cash collateral received a (3,333) (2,161) Derivative assets Currency swaps and forward contracts 485 169 Interest rate swaps 16 51 Other - 3 Total 501 223 Derivative liabilities Currency swaps and forward contracts (417) (625) Interest rate swaps (561) (328) Other (1) (2) Total (979) (955) Cash held in investment portfolio b 2,037 1,430 Receivable from investment securities traded and other assets 400 193 Payable for investment securities purchased c (699) (406) Net investment portfolio $ 85,831 $ 82,485 a. Includes $3,308 million of cash collateral received from counterparties under derivative agreements ($2,152 million—June 30, 2020). b. This amount is included in Unrestricted cash under Due from banks on the Balance Sheet. c. This amount includes $178 million of liabilities related to PCRF payable, which is included in Other liabilities – Accounts payable and miscellaneous liabilities on the Balance Sheet ($141 million—June 30, 2020), and $98 million of liabilities related to short sales ($162 million—June 30, 2020). The composition of IBRD’s net investment portfolio was as follows: Table C3: Net investment portfolio composition In millions of U.S. dollars June 30, 2021 June 30, 2020 Net investment portfolio Liquid asset portfolio $ 82,751 $ 79,908 PEBP holdings 2,476 1,847 PCRF holdings 555 450 AMC holdings 10 239 LCMD investments 39 41 Total $ 85,831 $ 82,485 IBRD uses derivative instruments to manage the associated currency and interest rate risk in the portfolio. For details regarding these instruments, see Note F—Derivative Instruments. After considering the effects of these derivatives, IBRD’s investment portfolio is predominantly denominated in U.S. dollars. Commercial Credit Risk For the purpose of risk management, IBRD is party to a variety of financial transactions, certain of which involve elements of credit risk. Credit risk exposure represents the maximum potential loss due to possible non-performance by obligors and counterparties under the terms of the contracts. For all securities, IBRD limits trading to a list of authorized dealers and counterparties. In addition, IBRD receives collateral in connection with resale agreements as well as swap agreements. This collateral serves to mitigate IBRD’s exposure to credit risk. Swap Agreements: Credit risk is mitigated through the application of eligibility criteria and volume limits for transactions with individual counterparties and through the use of mark-to-market collateral arrangements for swap transactions. IBRD may require collateral in the form of cash or other approved liquid securities from individual counterparties in order to mitigate its credit exposure. IBRD has entered into master derivative agreements, which contain legally enforceable close-out netting provisions. These agreements may further reduce the gross credit risk exposure related to the swaps. Credit risk with financial assets subject to a master derivatives arrangement is further reduced under these agreements to the extent that payments and receipts with the counterparty are netted at settlement. The reduction in exposure as a result of these netting provisions can vary due to the impact of changes in market conditions on existing and new transactions. The extent of the reduction in exposure 100 IBRD FINANCIAL STATEMENTS: JUNE 30, 2021 may, therefore, change substantially within a short period of time following the balance sheet date. For more information on netting and offsetting provisions see note F—Derivative Instruments. The following is a summary of the collateral received by IBRD related to swap transactions: Table C4: Collateral received In millions of U.S. dollars June 30, 2021 June 30, 2020 Collateral received Cash $ 3,308 $ 2,152 Securities 1,083 1,011 Total collateral received $ 4,391 $ 3,163 Collateral permitted to be repledged $ 4,391 $ 3,163 Amount of collateral repledged - - Amount of cash collateral invested 1,492 888 Securities Lending: IBRD may engage in securities lending and repurchases, against adequate collateral, as well as secured borrowing and reverse repurchases (resales) of government and agency obligations, corporate securities, ABS and MBS. These transactions have been conducted under legally enforceable master netting arrangements, which allow IBRD to reduce its gross credit exposure related to these transactions. For balance sheet presentation purposes, IBRD presents its securities lending and repurchases, as well as resales, on a gross basis. As of June 30, 2021, and June 30, 2020, there were no amounts which could potentially be offset as a result of legally enforceable master netting arrangements. Securities lending and repurchase agreements expose IBRD to several risks, including counterparty risk, reinvestment risk, and risk of a collateral gap (increase or decrease in the fair value of collateral pledged). IBRD has procedures in place to ensure that trading activity and balances under these agreements are below predefined counterparty and maturity limits, and to actively manage net counterparty exposure, after collateral, through daily mark-to-market. Whenever the collateral pledged by IBRD related to its borrowings under repurchase agreements and securities lending agreements declines in value, the transaction is re-priced as appropriate by returning cash or pledging additional collateral. Transfers of securities by IBRD to counterparties are not accounted for as sales as the accounting criteria for the treatment as a sale have not been met. Counterparties are permitted to repledge these securities until the repurchase date. As of June 30, 2021, liabilities relating to securities transferred under repurchase or securities lending agreements amounted to $25 million ($9 million — June 30, 2020) and there were no unsettled trades relating to repurchase or securities lending agreements. There were no replacement trades entered into in anticipation of maturing trades of a similar amount (Nil— June 30, 2020). As of June 30, 2021 and June 30, 2020, the remaining contractual maturity of these agreements were overnight and continuous. The securities transferred were mainly comprised of government and agency obligations and equity securities. In the case of resale agreements, IBRD receives collateral in the form of liquid securities and is permitted to repledge these securities. While these transactions are legally considered to be true purchases and sales, the securities received are not recorded on IBRD’s Balance Sheet as the accounting criteria for treatment as a sale have not been met. As of June 30, 2021 and June 30, 2020, there were no unsettled trades pertaining to securities purchased under resale agreements. For resale agreements, IBRD received securities with a fair value of $340 million ($396 million—June 30, 2020). As of June 30, 2021, and June 30, 2020, none of these securities had been transferred under repurchase or security lending agreements. IBRD FINANCIAL STATEMENTS: JUNE 30, 2021 101 NOTE D—LOANS AND OTHER EXPOSURES IBRD’s loans and other exposures (collectively “exposures”) are generally made to, or guaranteed by, member countries of IBRD. In addition, IBRD may also make loans to the IFC, an affiliated organization, without any guarantee. As of June 30, 2021, all IBRD’s loans were reported at amortized cost. IBRD’s loan portfolio includes loans with multicurrency terms, single currency pool terms, variable spread terms and fixed spread terms. At June 30, 2021, only loans with variable spread terms (including special development policy loans), were available for new commitments. Effective April 1, 2021, IBRD suspended the offering of loans on fixed spread terms. As of June 30, 2021, 85% of IBRD’s loans carried variable interest rates. IBRD uses derivative instruments to manage the currency risk as well as repricing risk between its loans and borrowings. After the effects of these derivatives, the loan portfolio carried variable interest rates, with a weighted average interest rate of 0.84% as of June 30, 2021 (1.65%—June 30, 2020). For details regarding derivatives used in the loan portfolio see Note F—Derivative Instruments. The majority of IBRD’s loans outstanding are denominated in U.S. dollars (79%) and euro (19%). IBRD excludes the interest receivable balance from the amortized cost basis and from the related disclosures as permitted by U.S. GAAP. As of June 30, 2021, accrued interest receivable on loans of $668 million is included in Other Receivables – Accrued income on loans in the Balance Sheet. As of June 30, 2021, only 0.2% of IBRD’s loans were in nonaccrual status and related to one borrower. The total accumulated provision for losses on loans in accrual and nonaccrual loans accounted for 0.6% of the total loan portfolio. Based on IBRD’s internal credit quality indicators, the majority of loans outstanding are in the medium-risk or high-risk classes. A summary of IBRD’s loans outstanding by currency and by interest rate characteristics (fixed or variable) is as follows: Table D1: Loans outstanding currency and interest rate structure In millions of U.S. dollars, except as otherwise noted June 30, 2021 Euro Japanese Yen U.S. dollars Others Loans Outstanding Fixed Variable Fixed Variable Fixed Variable Fixed Variable Fixed Variable Total Multicurrency terms a $ 20 $ 8 $ 19 $ 5 $ 35 $ 402 $ - $ - $ 74 $ 415 $ 489 Weighted average rate (%) b 2.78 6.38 2.78 6.38 7.13 6.11 - - 4.83 6.12 5.92 Average Maturity (years) 2.62 - 2.62 - 1.30 - - - 2.00 - 0.30 Variable-spread terms $ 6 $ 20,506 $ - $ 317 $ - $ 130,449 $ - $ 2,651 $ 6 $ 153,923 $ 153,929 Weighted average rate (%) b 0.51 0.16 - 0.58 - 0.95 - 8.42 0.51 0.97 0.97 Average Maturity (years) 1.12 8.20 - 7.96 - 8.73 - 7.71 1.12 8.64 8.64 Fixed-spread terms $ 12,917 $ 8,440 $ 2 $ 1,105 $ 19,670 $ 23,113 $ 482 $ 417 $ 33,071 $ 33,075 $ 66,146 Weighted average rate (%) b 2.10 0.34 2.30 0.44 3.40 1.26 7.84 3.56 2.96 1.03 1.99 Average maturity (years) 11.77 7.58 0.96 6.81 8.59 10.69 9.06 8.44 9.84 9.74 9.79 Loans Outstanding $ 12,943 $ 28,954 $ 21 $ 1,427 $ 19,705 $ 153,964 $ 482 $ 3,068 $ 33,151 $ 187,413 $ 220,564 Weighted average rate (%) b 2.10 0.22 2.72 0.49 3.40 1.01 7.84 7.76 2.96 0.99 1.29 Average Maturity (years) 11.75 8.02 2.42 7.04 8.58 9.00 9.06 7.81 9.82 8.82 8.97 Loans Outstanding $ 220,564 Less accumulated provision for loan losses and deferred loan income 1,765 Net loans outstanding $ 218,799 102 IBRD FINANCIAL STATEMENTS: JUNE 30, 2021 Table D1.1 In millions of U.S. dollars, except as otherwise noted June 30, 2020 Euro Japanese Yen U.S. dollars Others Loans Outstanding Fixed Variable Fixed Variable Fixed Variable Fixed Variable Fixed Variable Total Multicurrency terms a $ 24 $ 7 $ 19 $ 5 $ 41 $ 403 $ - $ - $ 84 $ 415 $ 499 Weighted average rate (%) b 2.78 6.42 2.78 6.42 6.52 6.22 - - 4.58 6.23 5.95 Average Maturity (years) 3.12 - 3.12 - 1.77 - - - 2.47 - 0.42 Variable-spread terms $ 8 $ 21,660 $ - $ 35 $ - $ 121,980 $ - $ 2,045 $ 8$ 145,720 $ 145,728 Weighted average rate (%) b 0.51 0.39 - 0.72 - 1.78 - 9.13 0.51 1.68 1.68 Average Maturity (years) 1.62 9.09 - 3.00 - 9.11 - 8.75 1.62 9.10 9.10 Fixed-spread terms $ 9,103 $ 7,365 $ 4 $ 1,160 $ 17,693 $ 21,817 $ 509 $ 353 $ 27,309 $ 30,695 $ 58,004 Weighted average rate (%) b 2.37 0.56 2.29 0.50 3.60 1.98 7.88 5.06 3.27 1.62 2.40 Average maturity (years) 11.95 7.66 1.35 7.64 8.35 10.62 9.57 8.78 9.57 9.77 9.68 Loans Outstanding $ 9,135 $ 29,032 $ 23 $ 1,200 $ 17,734 $ 144,200 $ 509 $ 2,398 $ 27,401 $ 176,830 $ 204,231 Weighted average rate (%) b 2.37 0.43 2.69 0.53 3.61 1.82 7.88 8.53 3.27 1.68 1.89 Average Maturity (years) 11.92 8.72 2.81 7.47 8.33 9.31 9.57 8.75 9.55 9.20 9.24 Loans Outstanding $ 204,231 Less accumulated provision for loan losses and deferred loan income 2,073 Net loans outstanding $ 202,158 a. Variable rates for multicurrency loans are based on the weighted average cost of allocated debt. b. Excludes effects of any waivers of loan interest. The maturity structure of IBRD’s loans is as follows: Table D2: Loans maturity structure In millions of U.S. dollars June 30,2021 July 1, 2021 through July 1, 2022 through July 1, 2026 through Terms/Rate Type June 30, 2022 June 30, 2026 June 30, 2031 Thereafter Total Multicurrency terms Fixed $ 29 $ 45 $ - $ - $ 74 Variable 415 - - - 415 Variable-spread terms Fixed 3 3 - - 6 Variable 9,841 37,628 51,750 54,704 153,923 Fixed-spread terms Fixed 1,562 7,153 8,194 16,162 33,071 Variable 1,519 8,591 8,808 14,157 33,075 All Loans Fixed 1,594 7,201 8,194 16,162 33,151 Variable 11,775 46,219 60,558 68,861 187,413 Total loans outstanding $ 13,369 $ 53,420 $ 68,752 $ 85,023 $ 220,564 Table D2.1 In millions of U.S. dollars June 30, 2020 July 1, 2020 through July 1, 2021 through July 1, 2025 through Terms/Rate Type June 30, 2021 June 30, 2025 June 30, 2030 Thereafter Total Multicurrency terms Fixed $ 29 $ 44 $ 11 $ - $ 84 Variable 415 - - - 415 Variable-spread terms Fixed 3 5 - - 8 Variable 6,567 36,327 46,868 55,958 145,720 Fixed-spread terms Fixed 1,554 5,747 6,519 13,489 27,309 Variable 1,699 7,875 7,857 13,264 30,695 All Loans Fixed 1,586 5,796 6,530 13,489 27,401 Variable 8,681 44,202 54,725 69,222 176,830 Total loans outstanding $ 10,267 $ 49,998 $ 61,255 $ 82,711 $ 204,231 IBRD FINANCIAL STATEMENTS: JUNE 30, 2021 103 Credit Quality of Sovereign Exposures Based on an evaluation of IBRD’s exposures, management has determined that IBRD has one portfolio segment – Sovereign Exposures. IBRD’s loans constitute the majority of the Sovereign Exposures portfolio segment. IBRD’s country risk ratings are an assessment of its borrowers’ ability and willingness to repay IBRD on time and in full. These ratings are internal credit quality indicators. Individual country risk ratings are derived on the basis of both quantitative and qualitative analysis. The components considered in the analysis can be grouped broadly into eight categories: political risk, external debt and liquidity, fiscal policy and public debt burden, balance of payments risks, economic structure and growth prospects, monetary and exchange rate policy, financial sector risks, and corporate sector debt and vulnerabilities. The analysis also takes into account Environmental, Social, and Governance (ESG) factors. For the purpose of analyzing the risk characteristics of IBRD’s exposures, these exposures are grouped into three classes in accordance with assigned borrower risk ratings, which relate to the likelihood of loss: Low, Medium and High-risk classes, as well as exposures in nonaccrual status. IBRD’s borrowers’ country risk ratings are key determinants in the provision for losses. Country risk ratings are grouped in pools of borrowers with similar credit ratings for the purpose of the calculation of the expected credit losses. Country risk ratings are determined in review meetings that take place several times a year. All countries are reviewed at least once a year, or more frequently, if circumstances warrant, to determine the appropriate ratings. An assessment was also performed to determine whether a qualitative adjustment of the loan loss provision was needed as of June 30, 2021, particularly in consideration of the COVID-19 pandemic. Management concluded that a qualitative adjustment beyond the regular application of IBRD’s loan loss provision framework was not warranted. The following tables provides an aging analysis of the loan portfolio: Table D3: Loan portfolio aging structure In millions of U.S. dollars June 30, 2021 Days past due Up to 45 46-60 61-90 91-180 Over 180 Total Past Due Current Total Risk Class Low $ - $ - $ - $ - $ - $ - $ 24,229 $ 24,229 Medium - - - - - - 93,530 93,530 High - - - - - - 102,373 102,373 Loans in accrual status - - - - - - 220,132 220,132 Loans in nonaccrual status - - - - 432 432 - 432 Total $ - $ - $ - $ - $ 432 $ 432 $ 220,132 $ 220,564 Table D3.1 In millions of U.S. dollars June 30, 2020 Days past due Up to 45 46-60 61-90 91-180 Over 180 Total Past Due Current Total Risk Class Low $ - $ - $ - $ - $ - $ - $ 23,424 $ 23,424 Medium - - - - - - 90,719 90,719 High - - - - - - 89,655 89,655 Loans in accrual status - - - - - - 203,798 203,798 Loans in nonaccrual status - - - - 433 433 - 433 Total $ - $ - $ - $ - $ 433 $ 433 $ 203,798 $ 204,231 IBRD considers the signature date of a loan agreement as the best indicator of the decision point in the origination process, rather than the disbursement date. 104 IBRD FINANCIAL STATEMENTS: JUNE 30, 2021 The table below discloses the outstanding balances of IBRD’s loan portfolio as of June 30, 2021, classified by the year the loan agreement was signed. Table D4: Loan portfolio vintage disclosure In millions of U.S. dollars June 30,2021 Fiscal Year of Origination CAT DDOs CAT DDOs Loans Disbursed Converted outstanding Prior and to Term as of June 2021 2020 2019 2018 2017 Years Revolving Loans 30, 2021 Risk Low $ - $ 109 $ 702 $ 237 $ 1,831 $ 21,350 $ - $ - $ 24,229 Medium 5,477 6,040 3,171 4,074 4,101 68,674 726 1,267 93,530 High 4,034 5,701 6,682 6,310 8,438 70,221 504 483 102,373 Loans in accrual status 9,511 11,850 10,555 10,621 14,370 160,245 1,230 1,750 220,132 Loans in nonaccrual status - - - - - 432 - - 432 Total $ 9,511 $ 11,850 $ 10,555 $ 10,621 $ 14,370 $ 160,677 $ 1,230 $ 1,750 $ 220,564 The amount of Catastrophe Deferred Drawdown Option (CAT DDOs) converted to term loans during the fiscal year ended June 30, 2021 is $282 million. Accumulated Provision for Losses on Loans and Other Exposures Management determines the appropriate level of accumulated provisions for losses, which reflects the expected losses inherent in IBRD’s exposures. The balance of accumulated provision as of July 1, 2020 decreased by the $214 million transition adjustment recorded upon adoption of CECL on that date. The transition adjustment corresponds to the difference between the accumulated provision calculated under the “incurred loss” model and the CECL model. IBRD FINANCIAL STATEMENTS: JUNE 30, 2021 105 Changes to the Accumulated provision for losses on loans and other exposures are summarized below: Table D5: Accumulated provision In millions of U.S. dollars June 30,2021 June 30, 2020 Loans Loan Loans outstanding commitments Other a Total outstanding Other a Total Accumulated provision, beginning of the fiscal year $ 1,599 $ - $ 99 $ 1,698 $ 1,574 $ 114 $ 1,688 CECL transition adjustment (465) 298 (47) (214) - - - Adjusted accumulated provision, beginning of the fiscal year 1,134 298 52 1,484 1,574 114 1,688 Provision - charge (release) 123 25 (2) 146 32 (14) 18 Translation adjustment 13 3 1 17 (7) (1) (8) Accumulated provision, end of the fiscal year $ 1,270 $ 326 $ 51 $ 1,647 $ 1,599 $ 99 $ 1,698 Composed of accumulated provision for losses on: Loans in accrual status $ 1,054 $ 1,383 Loans in nonaccrual status 216 216 Total $ 1,270 $ 1,599 Loans, end of the fiscal year: Loans in accrual status $ 220,132 $ 203,798 Loans in nonaccrual status 432 433 Total $ 220,564 $ 204,231 a. Provision does not include recoverable asset relating to Guarantees received under the EEAs (for more details see Guarantees section). Reported as follows Balance Sheet Statement of Income Accumulated Provision for Losses on: Loans outstanding Accumulated provision for loans Provision for losses on loans and other losses exposures Loan commitments and other exposures (excluding exposures to member countries’ Other liabilities Provision for losses on loans and other derivatives) exposures Overdue Amounts IBRD considers loans to be past due when a borrower fails to make payment on any principal, interest or other charges due to IBRD on the dates provided in the contractual loan agreement. At June 30, 2021, there were no principal or interest amounts on loans in accrual status, which were overdue by more than three months. Zimbabwe is the sole borrowing member with loans or guarantees in nonaccrual status and has been in nonaccrual status since October 2000. The following tables provide a summary of selected financial information related to loans in nonaccrual status as of and for the stated fiscal years: Table D6: Loans in nonaccrual status In millions of U.S. dollars June 30, 2021 June 30, 2020 Recorded investment in nonaccrual loans a $ 432 $ 433 Accumulated provision for loan losses on nonaccrual loans 216 216 Average recorded investment in nonaccrual loans for the fiscal year 433 433 Overdue amounts of nonaccrual loans: 1,042 1,015 Principal 432 433 Interest and charges 610 582 a. A loan loss provision has been recorded against each of the loans in nonaccrual status. 106 IBRD FINANCIAL STATEMENTS: JUNE 30, 2021 Table D6.1 In millions of U.S. dollars 2021 2020 2019 Interest revenue not recognized as a result of loans being in nonaccrual status $ 27 $ 28 $ 33 During the fiscal years ended June 30, 2021 and June 30, 2020, no loans were placed into nonaccrual status or restored to accrual status. In addition, during the fiscal year ended June 30, 2021, less than $1 million interest revenue was recognized on loans in nonaccrual status (less than $1 million—June 30, 2020 and less than $1 million—June 30, 2019). Guarantees Guarantees of $6,705 million were outstanding at June 30, 2021 ($6,898 million—June 30, 2020). This amount represents the maximum potential amount of undiscounted future payments that IBRD could be required to make under these guarantees, and is not included in the Balance Sheet. These guarantees have original maturities ranging between 6 and 21 years, and expire in decreasing amounts through 2042. At June 30, 2021, liabilities related to IBRD's obligations under guarantees of $397 million ($463 million—June 30, 2020), have been included in Other liabilities - Accounts payable and miscellaneous liabilities on the Balance sheet. These include the accumulated provision for guarantee losses of $50 million ($98 million—June 30, 2020). The cumulative effect of the adoption of the CECL ASU was a decrease of $48 million in the accumulated provision for guarantee losses as of July 1, 2020. During the fiscal years ended June 30, 2021 and June 30, 2020, no guarantees provided by IBRD were called. IBRD participates in Exposure Exchange Agreements (EEA) which are recognized as financial guarantees in the financial statements. Information on the location and amounts associated with the EEAs executed with Multilateral Investment Guarantee Agency (MIGA), African Development Bank (AfDB) and Inter-American Development Bank (IADB) included on the Balance Sheet and in the Statement of Income is presented in the following table: Table D7: Amounts associated with EEA In millions of U.S. dollars June 30, 2021 June 30, 2020 (Stand (Accumulated (Stand (Accumulated ready provision) ready provision) Notional obligation) Recoverable Notional obligation) Recoverable Location on amount Asset asset amount Asset asset Balance Sheet Guarantees provided a,b $ 3,640 $ (190) $ (20) $ 3,651 $ (210) $ (38) Other liabilities Guarantees received c (3,640) 190 17 (3,651) 210 28 Other assets $ - $ - $ (3) $ - $ - $ (10) a. For the fiscal year ended June 30, 2021, Provisions for losses on loans and other exposures line in the Statement of Income includes less than $1 million of release of provision relating to Guarantees provided ($3 million of provision —June 30,2020). The cumulative effect of the adoption of the CECL ASU was a decrease of $18 million in the accumulated provision relating to Guarantees provided, as of July 1, 2020. b. For the fiscal year ended June 30, 2021, Non-interest revenue—Other, net, line in the Statement of Income includes less than $1 million of reduction in recoverable asset relating to Guarantees received ($5 million of reduction in recoverable asset —June 30,2020). The cumulative effect of the adoption of the CECL ASU was a decrease of $11 million in the recoverable asset relating to Guarantees received, as of July 1, 2020. c. Notional amount, Stand ready obligation and Provision for the guarantees provided are included in guarantees outstanding of $6,705 million, obligations under guarantees of $397 million and accumulated provision for guarantee losses of $50 million, respectively ($6,898 million, $463 million and $98 million, respectively—June 30, 2020). Waivers of Loan Charges IBRD provides waivers on eligible loans, which include a portion of interest on loans, a portion of the commitment charge on undisbursed balances and a portion of the front-end fee charged on all eligible loans. Waivers are approved annually by the Executive Directors of IBRD. As part of the COVID-19 Strategic Preparedness and Response Program, the Executive Directors of IBRD approved the waiver of commitment/standby fees for health-related COVID-19 operations payable during the first year of each financing and a reduced front-end fee of 25 bps for Catastrophe Deferred Drawdown Options approved under the Fast Track COVID-19 Facility; as well as the waiver of commitment fees for COVID-19 vaccine related projects under the Additional Financing for the first 18 months, starting from the date of approval of financing for each project. IBRD FINANCIAL STATEMENTS: JUNE 30, 2021 107 The foregone income resulting from waivers of loan charges, is summarized in the following table: Table D8: Waivers of loan charges In millions of U.S. dollars 2021 2020 2019 Interest waivers $ 23 $ 31 $ 42 Commitment charge waivers 3 - - Front-end fee waivers 5 6 7 Total $ 31 $ 37 $ 49 Concentration Risk Loan revenue comprises interest, commitment fees, loan origination fees and prepayment premiums, net of waivers. For the fiscal year ended June 30, 2021, there was no country that contributed more than 10% of the total loan revenue. Information about IBRD’s loan revenue and associated loans outstanding by geographic region is presented in the following table: Table D9: Loan revenue and associated outstanding loan balances In millions of U.S. dollars 2021 2020 Region Loan Revenue a Loans Outstanding Loan Revenue a Loans Outstanding Latin America and the Caribbean $ 1,191 $ 68,525 $ 1,803 $ 61,757 Europe and Central Asia 472 48,012 751 45,529 East Asia and Pacific 620 46,574 1,196 44,656 Middle East and North Africa 402 30,868 661 28,641 South Asia 228 20,309 459 18,098 Eastern and Southern Africa b 223 4,665 238 4,117 Western and Central Africa b 32 1,611 31 1,433 Total $ 3,168 $ 220,564 $ 5,139 $ 204,231 a. Does not include interest expenses, net of $840 million from loan related derivatives ($487 million—June 30, 2020). Includes commitment charges of $115 million ($115 million—June 30, 2020). b. Effective July 1, 2020, Africa region has been reorganized into two regions: Eastern and Southern Africa and Western and Central Africa. NOTE E—BORROWINGS IBRD issues unsubordinated and unsecured fixed and variable rate debt in a variety of currencies. Variable rates may be based on, for example, exchange rates or market interest rates. Borrowings issued by IBRD are reported at fair value. As of June 30, 2021, 98% of the instruments in the portfolio were classified as Level 2, within the fair value hierarchy. In addition, most of these instruments were denominated in U.S. dollars and euro (61% and 13%, respectively). IBRD uses derivative contracts to manage the currency risk as well as the interest rate risk between its loans and borrowings. For details regarding the derivatives used, see Note F—Derivative Instruments. After the effect of these derivatives, the borrowing portfolio carried variable interest rates, with a weighted average cost of 0.12% as of June 30, 2021 (0.90% as of June 30, 2020). The following table summarizes IBRD’s borrowing portfolio after derivatives : Table E1: Borrowings after derivatives In millions of U.S. dollars June 30, 2021 June 30, 2020 Borrowings a $ 260,076 $ 243,240 Currency swaps, net (2,913) 2,211 Interest rate swaps, net (3,507) (8,220) $ 253,656 $ 237,231 a. There were no unsettled borrowings as of June 30, 2021 ($3 million—June 30, 2020, representing a non-cash financing activity, for which the related receivable is included in Other assets - Miscellaneous on the Balance Sheet). For the fiscal year ended June 30, 2021, Borrowing expenses, net in the Statement of Income of $662 million ($3,754 million—June 30, 2020) include $3,323 million of interest revenue, net related to derivatives associated with the Borrowing portfolio ($1,183 million—June 30, 2020). 108 IBRD FINANCIAL STATEMENTS: JUNE 30, 2021 The following table provides a summary of the interest rate characteristics of IBRD’s borrowings : Table E2: Interest rate composition of Borrowings In millions of U.S. dollars, except as otherwise noted June 30, 2021 WAC a (%) June 30, 2020 WAC a (%) Fixed $ 224,850 1.61 % $ 195,956 1.84 Variable 31,784 0.59 38,118 1.58 Borrowings b $ 256,634 1.49 % $ 234,074 1.80 % Fair Value Adjustment 3,442 9,166 Borrowings at fair value $ 260,076 $ 243,240 a. WAC refers to weighted average cost. b. At amortized cost. The currency composition of IBRD’s borrowing portfolio before derivatives was as follows: Table E3: Currency composition of Borrowings (before derivatives) June 30, 2021 June 30, 2020 U.S. Dollar 60.8 % 63.2 % Euro 13.3 11.8 Others 25.9 25.0 100.0 % 100.0 % The maturity structure of IBRD’s borrowings outstanding was as follows : Table E4: Maturity structure of Borrowings In millions of U.S. dollars June 30, 2021 June 30, 2020 Less than 1 year $ 45,240 $ 51,412 Between 1-2 years 29,652 35,118 2-3 years 28,319 24,271 3-4 years 34,367 25,545 4-5 years 28,210 37,415 Thereafter 94,288 69,479 $ 260,076 $ 243,240 IBRD’s borrowings have original maturities ranging from 35 days to 50 years, with the final maturity in 2064. NOTE F—DERIVATIVE INSTRUMENTS IBRD uses derivative instruments in its investment, loan and borrowing portfolios, and for asset/liability management purposes. It also offers derivative intermediation services to clients and, concurrently, enters into offsetting transactions with market counterparties. The following table summarizes IBRD’s use of derivatives in its various financial portfolios : Portfolio Derivative instruments used Purpose / Risk being managed Risk management purposes: Currency swaps, currency forward contracts, interest rate swaps, options, Manage currency and interest rate risks in the Investments swaptions and futures contracts, TBA portfolio securities Manage currency risk as well as interest rate risk Loans Currency swaps and interest rate swaps between loans and borrowings Manage currency risk as well as interest rate risk Borrowings Currency swaps and interest rate swaps between loans and borrowings Other asset/liability Manage currency risk and the duration of IBRD’s Currency swaps and interest rate swaps management derivatives equity Other purposes: Currency swaps, currency forward Assist clients in managing risks Client operations contracts, and interest rate swaps IBRD FINANCIAL STATEMENTS: JUNE 30, 2021 109 Under client operations, derivative intermediation services are provided to the following: Borrowing Countries: Currency and interest rate swap transactions are executed between IBRD and its borrowers under master derivatives agreements. Non-Affiliated Organizations: IBRD has a master derivatives agreement with the International Finance Facility for Immunisation (IFFIm), under which several transactions have been executed. Affiliated Organizations: Derivative contracts are executed between IBRD and IDA, under an agreement allowing IBRD to intermediate derivative contracts on behalf of IDA. The derivatives in the related tables of Note F are presented on a net basis by instrument. A reconciliation to the Balance Sheet presentation is shown in table F1. Offsetting assets and liabilities IBRD enters into International Swaps and Derivatives Association, Inc. (ISDA) master netting agreements with substantially all of its derivative counterparties. These legally enforceable master netting agreements give IBRD the right to liquidate securities held as collateral and to offset receivables and payables with the same counterparty, in the event of default by the counterparty. The following tables summarize the gross and net derivative positions by instrument type. Instruments that are in a net asset position are included in the Derivative Assets columns and instruments that are in a net liability position are included in the Derivative Liabilities columns. The gross columns represent the fair value of the instrument leg that is in an asset or liability postion that are then netted with the other leg of the instrument in the gross offset columns. The effects of the master netting agreements are applied on a aggregate basis to the total derivative asset and liability positions and are presented net of any cash collateral received on the Balance Sheet in accordance with ASC 815 – Derivatives and Hedging. The net derivative asset positions in the tables below have been further reduced by any securities received as collateral to disclose IBRD’s net exposure on its derivative asset positions. Table F1: Derivative assets and liabilities before and after netting adjustments In millions of U.S. dollars June 30, 2021 Location on the Balance Sheet Derivative Assets Derivative Liabilities Gross Amounts Net Amounts Gross Amounts Net Amounts Gross Amounts Offset Presented Gross Amounts Offset Presented Interest rate swaps $ 23,893 $ (13,832) $ 10,061 $ 26,577 $ (18,206) $ 8,371 Currency swaps a 98,836 (90,147) 8,689 44,173 (39,196) 4,977 Other b - - - 2 (1) 1 Total $ 122,729 $ (103,979) $ 18,750 d $ 70,752 $ (57,403) $ 13,349 d Less: Amounts subject to legally enforceable master netting 12,124 e 12,127 f agreements Cash collateral received c 3,271 Net derivative position on the Balance Sheet 3,355 1,222 Less: Securities collateral received c 1,012 Net derivative exposure after collateral $ 2,343 a. Includes currency forward contracts and structured swaps. b. These relate to swaptions, exchange traded options and futures contracts. c. Does not include excess collateral received. d. Total is based on amounts where derivatives have been netted by instrument. e. Includes $18 million CVA. f. Includes $21 million DVA. 110 IBRD FINANCIAL STATEMENTS: JUNE 30, 2021 Table F1.1 In millions of U.S. dollars June 30, 2020 Location on the Balance Sheet Derivative Assets Derivative Liabilities Gross Amounts Net Amounts Gross Amounts Net Amounts Gross Amounts Offset Presented Gross Amounts Offset Presented Interest rate swaps $ 22,129 $ (7,834) $ 14,295 $ 21,381 $ (13,011) $ 8,370 Currency swaps a 61,415 (55,342) 6,073 79,079 (71,492) 7,587 Other b 3 - 3 3 (1) 2 Total $ 83,547 $ (63,176) $ 20,371 d $ 100,463 $ (84,504) $ 15,959 d Less: Amounts subject to legally enforceable master netting 14,502 e 14,486 f agreements Cash collateral received c 2,125 Net derivative position on the Balance Sheet 3,744 1,473 Less: Securities collateral received c 928 Net derivative exposure after collateral $ 2,816 a. Includes currency forward contracts and structured swaps. b. These relate to swaptions, exchange traded options and futures contracts. c. Does not include excess collateral received. d. Total is based on amounts where derivatives have been netted by instrument. e. Includes $28 million CVA. f. Includes $12 million DVA. The following table provides information about the credit risk exposures of IBRD’s derivative instruments by portfolio, before the effects of master netting arrangements and collateral: Table F2: Credit risk exposure of the derivative instruments In millions of U.S. dollars June 30, 2021 Currency swaps Interest rate Portfolio (including currency Other a Total swaps forward contracts) Investments $ 16 $ 485 $ - $ 501 Loans 645 782 - 1,427 Client operations 1,227 648 - 1,875 Borrowings 6,529 6,774 - 13,303 Other asset/liability management derivatives 1,644 - - 1,644 Total Exposure $ 10,061 $ 8,689 $ - $ 18,750 In millions of U.S. dollars June 30, 2020 Currency swaps Interest rate Portfolio (including currency Other a Total swaps forward contracts) Investments $ 51 $ 169 $ 3 $ 223 Loans 42 1,134 - 1,176 Client operations 1,722 769 - 2,491 Borrowings 9,498 4,001 - 13,499 Other asset/liability management derivatives 2,982 - - 2,982 Total Exposure $ 14,295 $ 6,073 $ 3 $ 20,371 a. Includes swaptions, exchange traded options and futures contracts and TBA securities. Exchange traded instruments are generally subject to daily margin requirements and are deemed to have no material credit risk. All swaptions, options and futures contracts are interest rate contracts. The volume of derivative contracts is measured using the U.S. dollar equivalent notional balance. The notional balance represents the face value, or reference value, on which the calculations of payments on the derivative instruments are determined. At June 30, 2021, the notional amounts of IBRD’s derivative contracts outstanding were as follows: interest rate contracts $452,450 million ($474,644 million at June 30, 2020), currency swaps $136,467 million ($127,276 million at June 30, 2020), long positions of other derivatives $186 million ($362 million at June 30, 2020), and short positions of other derivatives $75 million ($56 million at June 30, 2020). IBRD FINANCIAL STATEMENTS: JUNE 30, 2021 111 IBRD is not required to post collateral under its derivative agreements as long as it maintains a triple-A credit rating. The aggregate fair value of all derivative instruments with credit-risk related contingent features that were in a liability position as of June 30, 2021 was $1,078 million ($1,138 million—June 30, 2020). IBRD has not posted any collateral with these counterparties due to its triple-A credit rating. If the credit-risk related contingent features underlying these agreements were triggered to the extent that IBRD would be required to post collateral as of June 30, 2021, the amount of collateral that would need to be posted would be $209 million ($156 million—June 30, 2020). Subsequent triggers of contingent features would require posting of additional collateral, up to a maximum of $1,078 million as of June 30, 2021 ($1,138 million—June 30, 2020). In contrast, IBRD received collateral totaling $4,391 million as of June 30, 2021 ($3,163 million—June 30, 2020) in relation to swap transactions (see Note C—Investments). The following table provides information on the amount of unrealized mark-to-market gains and losses on the non-trading derivatives and their location in the Statement of Income: Table F3: Unrealized mark-to-market gains and losses on non-trading derivatives In millions of U.S. dollars Unrealized mark-to-market (losses) gains Reported as: 2021 2020 2019 Interest rate swaps Unrealized mark-to-market $ (4,228) $ 3,914 $ 4,951 Currency swaps (including currency (losses) gains on non-trading forward contracts and structured swaps) portfolios, net (1,702) 838 849 Total $ (5,930) $ 4,752 $ 5,800 All of the instruments in IBRD's investment portfolio are held for trading purposes. Within the investment portfolio, IBRD holds highly rated fixed income securities, equity securities as well as derivatives. The trading portfolio is primarily held to ensure the availability of funds to meet future cash flow requirements, and for liquidity management purposes. The following table provides information on the amount of unrealized mark-to-market gains and losses on the net Investment-Trading portfolio and their location in the Statement of Income: Table F4: Unrealized mark-to-market gains and losses on net investment-trading portfolio In millions of U.S. dollars Unrealized mark-to-market gains (losses)a Reported as: 2021 2020 2019 Type of instrument Fixed income (including associated Unrealized mark-to-market derivatives) (losses) gains on trading $ 60 $ 189 $ 429 Equity b portfolios, net 171 4 21 Total $ 231 $ 193 $ 450 a. Amounts associated with each type of instrument include gains and losses on both derivative instruments and non-derivative instruments. b. Related to PEBP holdings. 112 IBRD FINANCIAL STATEMENTS: JUNE 30, 2021 NOTE G—RETAINED EARNINGS, ALLOCATIONS AND TRANSFERS The changes in the components of Retained Earnings are summarized below: Table G1: Retained Earnings composition In millions of U.S. dollars Cumulative Unallocated Restricted Special General Pension Fair Value Net Income Retained Other Reserve Reserve c Reserve c Surplus Adjustments (Loss) a Earnings c reserves d Total As of June 30, 2018 $ 293 27,693 810 216 (1,467) 875 37 - $ 28,457 Cumulative effect of change in accounting principle - - - - (155) - - - (155) As of July 1, 2018 293 27,693 810 216 (1,622) 875 37 - 28,302 Net income allocation a - 913 (22) - (266) (627) 3 - - Board of Governors-approved transfers funded from Surplus and other transfers b - - - (90) - 90 - - - Net income for the year - - - - - 505 - - 505 As of June 30, 2019 293 28,606 787 126 (1,888) 843 40 - 28,807 Net income allocation a - 831 6 100 (278) (584) (45) (30) - Board of Governors-approved transfers funded from Surplus and other transfers b - - - (126) - 81 - 45 - Net income for the year - - - - - (42) - - (42) As of June 30, 2020 293 29,437 793 100 (2,166) 298 (5) 15 28,765 Cumulative effect of change in accounting principle - - - - - - - 203 203 As of July 1, 2020 293 29,437 793 100 (2,166) 298 (5) 218 28,968 Net income allocation a c - 950 (62) 100 (1,137) 33 59 57 - Board of Governors-approved transfers funded from Surplus and other transfers b - - - (100) - 80 - 20 - Net income for the year - - - - - 2,039 - - 2,039 As of June 30, 2021 $ 293 $ 30,387 $ 731 $ 100 $ (3,303) $ 2,450 $ 54 $ 295 $ 31,007 a. Amounts retained as Surplus from the allocation of net income are approved by the Board of Governors. b. A concurrent transfer is made from Surplus to Unallocated Net Income (Loss) for all transfers reported on the Statement of Income and authorized to be funded from Surplus. c. May differ from the sum of individual figures due to rounding. d. Comprised of non-functional currency translation gains/losses, the unutilized portion of the transfer to the GPG Fund and the cumulative effect related to the adoption of ASU 2016-13 (CECL) on July 1, 2020. IBRD makes net income allocation decisions on the basis of reported net income, adjusted to exclude unrealized mark-to- market gains and losses on non-trading portfolios, net, restricted income and Board of Governors-approved and other transfers, non-functional currency translation adjustments and after considering the allocation to the pension reserve. On August 6, 2020, IBRD’s Executive Directors approved the following adjustments and allocations relating to the net income earned in the fiscal year ended June 30, 2020, to arrive at allocable income for that fiscal year: • $1,137 million increase in the Cumulative Fair Value Adjustments, for the Unrealized mark-to-market losses on non-trading portfolios (this excludes realized amounts). • Add back $340 million related to Board of Governors-approved transfers approved in the fiscal year ended June 30, 2020, to reported Net Income to arrive at allocable income. These transfers relate to income earned in prior fiscal years. • $950 million increase in the General Reserve. • $62 million decrease in the Pension Reserve. • $57 million increase in Other reserves, for net non-functional currency translation adjustment. On August 24, 2020, IBRD’s Board of Governors approved a transfer of $20 million from Surplus to the IBRD Fund for Innovative Global Public Goods Solutions (GPG Fund). The transfer was made on September 4, 2020, resulting in a IBRD FINANCIAL STATEMENTS: JUNE 30, 2021 113 reduction in Surplus and an increase in Other reserves. These funds will be expensed, and Other reserves reduced, when utilized by the GPG fund. As of June 30, 2021, no funds have been utilized out of the cumulative transfers of $65 million and therefore, no expense has been recognized in the Statement of Income. On October 7, 2020, IBRD’s Board of Governors approved a transfer of $80 million from Surplus to the Trust Fund for Gaza and West Bank. The transfer was made on October 19, 2020. On October 15, 2020, IBRD’s Board of Governors approved a transfer of $431 million to Surplus out of the net income earned in the fiscal year ended June 30, 2020 which consists of $100 million to provide grant support for development needs, and $331 million representing the final amount calculated in accordance with the formula for IBRD’s income support to IDA. On January 25, 2021, the Board of Governors approved a transfer of $331 million to IDA from Surplus, which was made on February 1, 2021. Board of Governors-approved and other transfers that were expensed during the stated fiscal years are included in the following table: Table G2: Board of Governors-approved and other transfers expensed In millions of U.S. dollars Transfers funded from: 2021 2020 2019 Unallocated Net Income: IDA $ 331 $ 259 $ 248 Surplus: Trust fund for Gaza and West Bank 80 81 90 Total $ 411 $ 340 $ 338 There were no amounts payable for the transfers approved by the Board of Governors at June 30, 2021, and at June 30, 2020. NOTE H—TRANSACTIONS WITH AFFILIATED ORGANIZATIONS IBRD transacts with affiliated organizations by providing loans, administrative and derivative intermediation services, as well as through its pension and other postretirement benefit plans. In addition, IBRD provides transfers to IDA out of its net income, upon approval by the Board of Governors (see Note G—Retained Earnings, Allocations and Transfers). IBRD had the following receivables from (payables to) its affiliated organizations: Table H1: IBRD’s receivables and payables with affiliated organizations In millions of U.S. dollars June 30, 2021 June 30, 2020 IDA IFC MIGA Total IDA IFC MIGA Total Administrative Services, net $ 268 $ 36 $ 13 $ 317 $ 271 $ 63 $ 13 $ 347 Derivative Transactions a Derivative assets, net 27 - - 27 53 - - 53 Derivative liabilities, net (19) - - (19) (74) - - (74) Pension and Other Postretirement Benefits (572) (645) (25) (1,242) (620) (477) (18) (1,115) Investments - (178) - (178) - (141) - (141) Total $ (296) $ (787) $ (12) $ (1,095) $ (370) $ (555) $ (5) $ (930) a. Presented on a net basis by instrument. For details on derivative transactions relating to swap intermediation services provided by IBRD to IDA see Note F—Derivative Instruments. The receivables from (payables to) balances these affiliated organizations are reported on the Balance Sheet as follows: Receivables / Payables related to: Reported as: Loans Loans outstanding Administrative services a Other assets Derivative transactions Derivative assets/liabilities – net Pension and other postretirement benefits Other liabilities a. Includes amounts payable to IDA for its share of investments associated with PCRF. This payable is included in Other Liabilities - Accounts payable and miscellaneous liabilities on the Balance Sheet. 114 IBRD FINANCIAL STATEMENTS: JUNE 30, 2021 Loans and Other Exposures IBRD has a Local Currency Loan Facility Agreement with IFC, which is capped at $300 million. As of June 30, 2021 and June 30, 2020, there were no loans outstanding under this facility. During the fiscal year ended June 30, 2014, IBRD entered into an exposure exchange agreement with MIGA under which IBRD and MIGA exchange selected exposures, with each divesting exposure in countries where their lending capacities are limited, in return for exposure in countries where they have excess lending capacity. Under the agreement, IBRD and MIGA have each exchanged $120 million of notional exposure as follows: MIGA assumes IBRD's loan principal and interest exposure in exchange for IBRD's assumption of principal and interest exposure of MIGA under its Non-Honoring of Sovereign Financial Obligation agreement. As of June 30, 2021, assets related to IBRD’s right to be indemnified under this agreement amounted to $1 million ($1 million—June 30, 2020), while liabilities related to IBRD’s obligation under this agreement amounted to $1 million ($1 million—June 30, 2020). These include an accumulated provision for guarantee losses of less than $1 million as of June 30, 2021 (less than $1 million—June 30, 2020). Administrative Services Expenses jointly incurred by IBRD and IDA are allocated based on an agreed cost-sharing methodology, and amounts are settled quarterly. For the fiscal year ended June 30, 2021, IBRD’s administrative expenses are net of the share of expenses allocated to IDA of $1,873 million ($1,824 million—fiscal year ended June 30, 2020, and $1,795 million—fiscal year ended June 30, 2019). Revenue Revenue jointly earned by IBRD and IDA is allocated based on an agreed revenue-sharing methodology, and amounts are settled quarterly. For the fiscal year ended June 30, 2021, IBRD’s other revenue is net of revenue allocated to IDA of $261 million ($316 million—fiscal year ended June 30, 2020, and $316 million—fiscal year ended June 30, 2019), and is included in Revenue from externally funded activities in the Statement of Income. This revenue also includes revenue from contracts with clients, who are not affiliated with IBRD as follows: Table H2: Revenue from contracts with clients In millions of U.S. dollars 2021 2020 2019 Trust fund fees $ 82 $ 83 $ 90 Reimbursable advisory services 98 132 115 Asset management services 28 30 27 $ 208 $ 245 $ 232 Of which: IBRD's share $ 112 $ 125 $ 113 IDA's share 96 120 119 Each revenue stream represents compensation for services provided and the related revenue is recognized over time. IBRD’s rights to consideration are deemed unconditional and are classified as receivables. IBRD also has an obligation to provide certain services for which it has received consideration in advance. Such considerations are presented as contract liabilities and are subsequently recognized as revenue, when the related performance obligation is satisfied. The following table shows IBRD’s receivables and contract liabilities related to revenue from contracts with clients: Table H3: Receivables and contract liabilities related to revenue from contract with clients In millions of U.S. dollars June 30, 2021 June 30, 2020 Receivables $ 79 $ 114 Contract liabilities 196 169 The amount of fee revenue associated with services provided to affiliated organizations is included in Revenue from externally funded activities in the Statement of Income, as follows: Table H4: Fee revenue from affiliated organizations In millions of U.S. dollars 2021 2020 2019 Fees charged to IFC $ 89 $ 83 $ 74 Fees charged to MIGA 6 5 5 IBRD FINANCIAL STATEMENTS: JUNE 30, 2021 115 Pension and Other Postretirement Benefits The payable to IDA represents IDA’s net share of prepaid cost for pension and other postretirement benefit plans and PEBP assets. These will be realized over the life of the plan participants. The payables to IFC and MIGA represent their respective share of PEBP assets. The PEBP assets are managed by IBRD and are a part of the investment portfolio. For Pension and Other Postretirement Benefits-related disclosures see Note J—Pension and Other Postretirement Benefits. Derivative Transactions These relate to currency forward contracts entered into for IDA with IBRD acting as the intermediary with the market. Investments These relate to investments that IBRD has made on behalf of IFC, associated with the PCRF and are included in Investments-Trading on IBRD’s Balance Sheet. The corresponding payable to IFC is included in the amount payable for investment securities purchased - on IBRD’s Balance Sheet. As a result, there is no impact on IBRD’s investments net asset value from these transactions. NOTE I—MANAGEMENT OF EXTERNAL FUNDS AND OTHER SERVICES Trust Funds IBRD, alone or jointly with one or more of its affiliated organizations, administers on behalf of donors, including members, their agencies and other entities, funds restricted for specific uses in accordance with administration agreements with donors. Specified uses could include co-financing of IBRD lending projects, debt reduction operations, technical assistance including feasibility studies and project preparation, global and regional programs, and research and training programs. These funds are held in trust with IBRD and/or IDA, and are held in a separate investment portfolio which is not commingled with IBRD and/or IDA funds. Trust fund execution may be carried out in one of two ways: Recipient-executed or IBRD-executed. Recipient-executed trust funds involve activities carried out by a recipient third-party executing agency. IBRD enters into agreements with and disburses funds to those recipients, who then exercise spending authority to meet the objectives and comply with terms stipulated in the agreements. IBRD-executed trust funds involve IBRD execution of activities as described in relevant administration agreements with donors, which define the terms and conditions for use of the funds. Spending authority is exercised by IBRD, under the terms of the administration agreements. The executing agency services provided by IBRD vary and include for example, activity preparation, analytical and advisory activities and project-related activities, including procurement of goods and services. The following table summarizes the expenses pertaining to IBRD-executed trust funds: Table I1: Expenses pertaining to IBRD-executed trust funds In millions of U.S. dollars 2021 2020 2019 IBRD-executed trust fund expenses $ 470 $ 470 $ 603 These amounts are included in Administrative expenses and the corresponding revenue is included in Revenue from externally funded activities in the Statement of Income. Administrative expenses primarily relate to staff costs, travel and consultant fees. The following table summarizes all undisbursed contributions made by third party donors to IBRD-executed trust funds, recognized on the Balance Sheet: Table I2: Undisbursed contributions by third party donors to IBRD-executed trust funds In millions of U.S. dollars 2021 2020 IBRD-executed trust funds $ 552 $ 534 These amounts are included in Other assets - Miscellaneous and the corresponding liabilities are included in Other liabilities – Accounts payable and miscellaneous liabilities on the Balance Sheet. 116 IBRD FINANCIAL STATEMENTS: JUNE 30, 2021 Revenues IBRD’s revenues for the administration of trust fund operations were as follows: Table I3: Trust fund administration revenues In millions of U.S. dollars 2021 2020 2019 Revenues $ 44 $ 42 $ 44 These amounts are included in Revenue from externally funded activities in the Statement of Income. Revenue collected from donor contributions for trust fund administation fees, but not yet earned by IBRD totaling $95 million at June 30, 2021 ($66 million—June 30, 2020) is included in Other assets - Miscellaneous and in Other liabilities – Accounts payable and miscellaneous liabilities, correspondingly, on the Balance Sheet. Investment Management Services IBRD offers treasury and investment management services to affiliated and non-affiliated organizations. In addition, IBRD offers asset management and technical advisory services to central banks of member countries, under the Reserves Advisory and Management Program, for capacity building and other development purposes, and receives a fee for these services. During the fiscal year ended June 30, 2021, IBRD fee revenue from investment management activities totaled $19 million ($17 million –June 30, 2020 and $15 million – June 30, 2019) and is included in Revenue from externally funded activities in the Statement of Income. Other Services In June 2009, donors to AMC provided IBRD with commitments to give $1.5 billion through December 2020, with the GAVI Alliance (GAVI) as the named beneficiary. The assets will be drawn down by GAVI in accordance with the terms of the AMC, which require that the funds be used to make payments for qualifying vaccines. Should a donor fail to pay, IBRD has committed to pay the shortfall. For this commitment, IBRD charges an annual 30 basis point premium on outstanding grant payments not yet paid by AMC donors. As of June 30, 2021, the undisbursed balance of contributions received from AMC donors amounted to $10 million ($236 million—June 30, 2020). Amounts held in investments relating to AMC, including investment income, totaled $10 million ($239 million—as of June 30, 2020) and are included in IBRD’s investment holdings. The payables under the AMC program are included in Other liabilities - Accounts payable and miscellaneous liabilities. As of June 30, 2021, there was no fee revenue from these arrangements ($1 million—June 30, 2020 and $2 million—June 30, 2019, included in non- interest revenue – Other, net). As of June 30, 2021, there were no receivables from AMC donors (Nil-June 30, 2020) and IBRD no longer has an obligation to pay in the event of a donor default. NOTE J—PENSION AND OTHER POSTRETIREMENT BENEFITS IBRD, IFC and MIGA participate in the defined benefit Staff Retirement Plan (SRP), a Retired Staff Benefits Plan (RSBP) and PEBP that cover substantially all of their staff members. The SRP provides pension benefits and includes a cash balance plan. The RSBP provides certain health and life insurance benefits to eligible retirees. The PEBP provides certain pension benefits administered outside the SRP. IBRD uses a June 30th measurement date for its pension and other postretirement benefit plans. All costs, assets and liabilities associated with these plans are allocated between IBRD, IFC, and MIGA based upon their employees’ respective participation in the plans. Costs allocated to IBRD are then shared between IBRD and IDA based on an agreed cost-sharing methodology. IDA, IFC and MIGA reimburse IBRD for their proportionate share of any contributions made to these plans by IBRD. Contributions to the plans are calculated as a percentage of salary. As of June 30, 2021, the SRP and RSBP were underfunded by $320 million and $90 million, respectively. The PEBP, after reflecting IBRD and IDA’s share of assets which are included in the IBRD’s investment portfolio ($1,806 million), was underfunded by $533 million. IBRD FINANCIAL STATEMENTS: JUNE 30, 2021 117 The following table summarizes the benefit costs associated with the SRP, RSBP, and PEBP for IBRD and IDA: Table J1: Pension Plan benefit costs In millions of U.S. dollars SRP RSBP PEBP 2021 2020 2019 2021 2020 2019 2021 2020 2019 Service cost $ 642 $ 547 $ 471 $ 170 $ 143 $ 124 $ 111 $ 97 $ 86 Interest cost 588 687 733 107 118 120 56 71 71 Expected return on plan assets (967) (1,024) (1,009) (162) (169) (161) - - - Amortization of unrecognized prior service costs a 3 3 3 17 17 18 3 3 3 Amortization of unrecognized net actuarial losses a 311 90 21 12 - - 55 82 65 Net periodic pension cost $ 577 $ 303 $ 219 $ 144 $ 109 $ 101 $ 225 $ 253 $ 225 of which: IBRD’s share $ 276 $ 140 $ 99 $ 69 $ 51 $ 45 $ 107 $ 117 $ 102 IDA’s share 301 163 120 75 58 56 118 136 123 2021 2020 2019 Net periodic pension cost (all three plans combined) IBRD’s share $ 452 $ 308 $ 246 IDA’s share 494 357 299 a. Included in Amounts reclassified into net income in Note K—Accumulated Other Comprehensive Loss. IDA’s share of benefit costs is included as a payable to/receivable from IDA in Other liabilities – Accounts payable and miscellaneous liabilities on the Balance Sheet (see Note H—Transactions with Affiliated Organizations). The components of net periodic pension cost, other than the service cost component, are included in the Non-interest expenses – Pension line item in the Statement of Income. The service cost component is included in the line item Non- interest expenses – Administrative expenses. The following table provides the amounts of IBRD’s pension service cost: Table J2: Pension service cost In millions of U.S. dollars 2021 SRP RSBP PEBP Total Service cost $ 642 $ 170 $ 111 $ 923 Of which: IBRD’s share $ 307 $ 81 $ 53 $ 441 IDA’s share 335 89 58 482 In millions of U.S. dollars 2020 SRP RSBP PEBP Total Service cost $ 547 $ 143 $ 97 $ 787 Of which: IBRD’s share $ 254 $ 66 $ 45 $ 365 IDA’s share 293 77 52 422 In millions of U.S. dollars 2019 SRP RSBP PEBP Total Service cost $ 471 $ 124 $ 86 $ 681 Of which: IBRD’s share $ 213 $ 56 $ 39 $ 308 IDA’s share 258 68 47 373 118 IBRD FINANCIAL STATEMENTS: JUNE 30, 2021 The following table summarizes the Projected Benefit Obligations (PBO), fair value of plan assets, and funded status associated with the SRP, RSBP, and PEBP for IBRD and IDA. The SRP and RSBP assets are held in separate trusts and the PEBP assets are included in IBRD's investment portfolio. The assets of the PEBP are mostly invested in fixed income, equity instruments and alternative investments. Table J3: PBO, funded status and accumulated benefit obligations In millions of U.S. dollars SRP RSBP PEBP 2021 2020 2021 2020 2021 2020 Projected Benefit Obligations Beginning of year $ 23,536 $ 20,587 $ 3,997 $ 3,401 $ 2,167 $ 2,102 Service cost 642 547 170 143 111 97 Interest cost 588 687 107 118 56 71 Participant contributions 160 165 28 28 4 14 Benefits paid (743) (766) (91) (93) (35) (25) Actuarial loss (gain) 545 2,316 24 400 36 (92) End of year 24,728 23,536 4,235 3,997 2,339 2,167 Fair value of plan assets Beginning of year 19,266 19,180 3,195 3,104 Participant contributions 160 165 28 28 Actual return on assets 5,507 480 955 99 Employer contributions 218 207 58 57 Benefits paid (743) (766) (91) (93) End of year 24,408 19,266 4,145 3,195 Funded Status a $ (320) $ (4,270) $ (90) $ (802) $ (2,339) $ (2,167) Accumulated Benefit Obligations $ 23,127 $ 21,937 $ 4,235 $ 3,997 $ 2,087 $ 1,899 a. Funded status is included in Other liabilities – Liabilities under retirement benefits plans, on the Balance Sheet. During the fiscal years ended June 30, 2021 and June 30, 2020, there were no amendments made to the retirement benefit plans. The following tables present the amounts included in Accumulated Other Comprehensive Loss relating to Pension and Other Postretirement Benefits: Table J4: Amounts included in Accumulated Other Comprehensive Loss at June 30, 2021 In millions of U.S. dollars SRP RSBP PEBP Total Net actuarial loss (gain) $ 1,281 $ (263) $ 622 $ 1,640 Prior service cost 12 42 12 66 Net amount recognized in Accumulated Other Comprehensive Loss $ 1,293 $ (221) $ 634 $ 1,706 Table J4.1: Amounts included in Accumulated Other Comprehensive Loss at June 30, 2020 In millions of U.S. dollars SRP RSBP PEBP Total Net actuarial loss $ 5,588 $ 517 $ 640 $ 6,745 Prior service cost 14 60 15 89 Net amount recognized in Accumulated Other Comprehensive Loss $ 5,602 $ 577 $ 655 $ 6,834 Assumptions The actuarial assumptions used are based on financial market interest rates, inflation expectations, past experience, and Management’s best estimate of future benefit changes and economic conditions. Changes in these assumptions will impact future benefit costs and obligations. The expected long-term rate of return for the SRP assets is a weighted average of the expected long-term (10 years or more) returns for the various asset classes, weighted by the portfolio allocation. Asset class returns are developed using a forward-looking building block approach and are not strictly based on historical returns. Equity returns are generally developed as the sum of expected inflation, expected real earnings growth and expected long-term dividend yield. Bond returns are generally developed as the sum of expected inflation, real bond yield, duration-adjusted change in yields and risk premium/spread (as appropriate). Other asset class returns are derived from their relationship to equity and bond markets. The expected long-term rate of return for the RSBP is computed using procedures similar to those used for the SRP. The discount rate used in determining the benefit obligation is selected by reference to the year-end yield of AA corporate bonds. IBRD FINANCIAL STATEMENTS: JUNE 30, 2021 119 Actuarial gains and losses occur when actual results are different from expected results. Amortization of these unrecognized gains and losses will be included in income if, at the beginning of the fiscal year, they exceed 10 percent of the greater of the projected benefit obligation or the market-related value of plan assets. If required, the unrecognized gains and losses are amortized over the expected average remaining service lives of the employee group. The following tables present the weighted-average assumptions used in determining the projected benefit obligations and the net periodic pension costs: Table J5: Weighted average assumptions used to determine projected benefit obligations In percent, except years SRP RSBP PEBP 2021 2020 2021 2020 2021 2020 Discount rate 2.70 2.60 2.80 2.70 2.80 2.60 Rate of compensation increase 4.80 4.60 4.80 4.60 Health care growth rates -at end of fiscal year 5.40 5.40 Ultimate health care growth rate 3.90 3.70 Year in which ultimate rate is reached 2031 2031 Interest crediting rate 4.90 4.60 n.a n.a 4.90 4.60 Table J6: Weighted average assumptions used to determine net periodic pension cost In percent, except years SRP RSBP PEBP 2021 2020 2019 2021 2020 2019 2021 2020 2019 Discount rate 2.60 3.40 4.10 2.70 3.50 4.10 2.60 3.50 4.10 Expected return on plan assets 5.10 5.40 5.70 5.10 5.50 5.70 Rate of compensation increase 4.60 4.90 5.50 4.60 4.90 5.50 Health care growth rates -at end of fiscal year 5.40 6.20 6.00 Ultimate health care growth rate 3.70 3.90 4.20 Year in which ultimate rate is reached 2031 2030 2030 Interest crediting rate 4.60 4.90 5.20 n.a n.a n.a 4.60 4.90 5.20 The medical cost trend rate can significantly affect the reported postretirement benefit income or costs and benefit obligations for the RSBP. For the fiscal year ended June 30, 2021, the actuarial loss was primarily due to a decrease in the real discount rates, whereas the nominal discount rates increased due to an increase in expected inflation. For the fiscal year-ended June 30, 2020, the actuarial loss was primarily the result of a decrease in the discount rates. Investment Strategy The investment policies establish the framework for investment of the plan assets based on long-term investment objectives and the trade-offs inherent in seeking adequate investment returns within acceptable risk parameters. A key component of the investment policy is to establish a Strategic Asset Allocation (SAA) representing the policy portfolio (i.e., policy mix of assets) around which the SRP and RSBP (the Plans) are invested. The SAA is derived using a mix of quantitative analysis that incorporates expected returns and volatilities by asset class as well as correlations across the asset classes, and qualitative considerations such as the liquidity needs of the Plans. The SAA for the Plans is reviewed in detail and reset about every three to five years, with more frequent reviews and changes if and as needed based on market conditions. The key long-term objective is to generate asset performance that is reasonable in relation to the growth rate of the underlying liabilities and the assumed sponsor contribution rates, without taking undue risks. Given the relatively long investment horizons of the SRP and RSBP, and the relatively modest liquidity needs over the short-term to pay benefits and meet other cash requirements, the focus of the investment strategy is on generating sustainable long-term investment returns through a globally diversified set of strategies including fixed income, public and private equity and real assets. In the first half of the fiscal year ending June 30, 2021, following the onset of the global pandemic, the Pension Finance Committee (PFC) re-assessed the assumptions underlying the SAA and reaffirmed the appropriateness of the Long-Term Real Return Objective within the current risk tolerance parameters. The review of the SAA was completed and approved in April 2021 with an effective date of June 1, 2021. The new SAAs slightly reduced the Fixed Income and Cash policy allocation from 23% percent to 20% and increased the policy allocation to Credit Strategy and Market Neutral Hedge Funds by 1% and 2% percent, respectively. The changes do not materially alter the risk profile of the portfolio but are expected to slightly increase the efficiency of the allocation. 120 IBRD FINANCIAL STATEMENTS: JUNE 30, 2021 The following table presents the policy asset allocation and the actual asset allocations by asset category for the SRP and RSBP: Table J7: Policy and actual asset allocations SRP RSBP Policy allocation Actual Allocation (%) Policy allocation Actual Allocation (%) Asset class 2021 (%) 2021 2020 2021 (%) 2021 2020 Fixed income and Cash 20 20 19 20 21 20 Credit Strategy 6 7 7 6 6 6 Public equity 31 25 29 31 23 27 Private equity 20 26 21 20 28 24 Market neutral hedge funds 10 9 10 10 8 9 Real assets a 13 12 13 13 13 13 Other b - 1 1 - 1 1 Total 100 100 100 100 100 100 a. Includes public and private real estate, infrastructure and timber. b. Includes authorized investments that are outside the policy allocations primarily in hedge funds. Significant Concentrations of Risk in Plan Assets The assets of the SRP and RSBP are diversified across a variety of asset classes. Investments in these asset classes are further diversified across funds, managers, strategies, geographies and sectors, to limit the impact of any individual investment. In spite of such level of diversification, equity market risk remains the primary source of the overall return volatility of the Plans. As of June 30, 2021, the largest exposure to a single counterparty was 8% and 6% of the plan assets in SRP and RSBP, respectively (8% and 6%, respectively—June 30, 2020). Risk Management Practices Managing investment risk is an integral part of managing the assets of the Plans. Asset diversification is central to the overall investment strategy and risk management approach for the Plans. Absolute risk indicators such as the overall return volatility and drawdown of the Plans are the primary measures used to define the risk tolerance level and establish the overall level of investment risk. In addition, the level of active risk (defined as the annualized standard deviation of portfolio returns relative to those of the policy portfolio) is closely monitored and managed on an ongoing basis. Market risk is regularly monitored at the absolute level, as well as at the relative levels with respect to the investment policy, manager benchmarks, and liabilities of the Plans. Stress tests are performed periodically using relevant market scenarios to assess the impact of extreme market events. Monitoring performance (at both manager and asset class levels) against benchmarks, and compliance with investment guidelines, are carried out on a regular basis which provides helpful information for assessing the impact on the portfolios caused by market risk factors. Risk management for different asset classes is tailored to their specific characteristics and is an integral part of the external managers’ due diligence and monitoring processes. Credit risk is monitored on a regular basis and assessed for possible credit event impacts. The liquidity position of the Plans is analyzed at regular intervals and periodically tested using various stress scenarios to ensure that the Plans have sufficient liquidity to meet all cash flow requirements. In addition, the long-term cash flow needs of the Plans are considered during the SAA exercise and are one of the main drivers in determining maximum allocation to the illiquid investment vehicles. The Plans mitigate operational risk by maintaining a system of internal controls along with other checks and balances at various levels. IBRD FINANCIAL STATEMENTS: JUNE 30, 2021 121 Fair Value Measurements and Disclosures All plan assets are measured at fair value on a recurring basis. The following table presents the fair value hierarchy of major categories of plan assets: Table J8: Plan assets fair value hierarchy In millions of U.S. dollars June 30, 2021 SRP RSBP Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total Debt securities Discount notes and time deposits $ 20 $ 8 $ - $ 28 $ 7 $ 3 $ - $ 10 Securities purchased under resale agreements 231 - - 231 39 - - 39 Government and agency securities 3,220 173 - 3,393 631 36 - 667 Corporate and convertible bonds - 605 - 605 - 108 - 108 ABS - 164 - 164 - 31 - 31 MBS - 272 - 272 - 47 - 47 Total debt securities 3,471 1,222 - 4,693 677 225 - 902 Equity securities Stocks 2,761 - - 2,761 426 - - 426 Mutual funds 2 - - 2 - - - - Real estate investment trusts (REITs) 222 - - 222 33 - - 33 Total equity securities 2,985 - - 2,985 459 - - 459 Other funds at NAV a Commingled funds - - - 3,571 - - - 534 Private equity funds - - - 6,366 - - - 1,163 Private credit - - - 1,604 - - - 258 Real estate funds (including infrastructure and timber) - - - 2,700 - - - 488 Hedge funds - - - 2,247 - - - 324 Total other funds - - - 16,488 - - - 2,767 Derivative assets/liabilities 2 2 - 4 - - - - Other assets/liabilities, net b - - - 238 - - - 17 Total assets $ 6,458 $ 1,224 $ - $ 24,408 $ 1,136 $ 225 $ - $ 4,145 a. Investments measured at fair value using NAV have not been included under the fair value hierarchy. b. Includes receivables and payables carried at amounts that approximate fair value. 122 IBRD FINANCIAL STATEMENTS: JUNE 30, 2021 J8.1 In millions of U.S. dollars June 30, 2020 SRP RSBP Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total Debt securities Discount notes and time deposits $ 4 $ 54 $ - $ 58 $ 1 $ 11 $ - $ 12 Securities purchased under resale agreements 68 - - 68 12 - - 12 Government and agency securities 2,016 310 - 2,326 368 60 - 428 Corporate and convertible bonds - 510 - 510 - 86 - 86 ABS - 152 - 152 - 26 - 26 MBS - 348 - 348 - 60 - 60 Total debt securities 2,088 1,374 - 3,462 381 243 - 624 Equity securities Stocks 2,955 - - 2,955 475 - - 475 Mutual funds 19 - - 19 3 - - 3 Real estate investment trusts (REITs) 160 - - 160 26 - - 26 Total equity securities 3,134 - - 3,134 504 - - 504 Other funds at NAV a Commingled funds - - - 2,710 - - - 400 Private equity funds - - - 4,127 - - - 748 Private credit - - - 1,255 - - - 201 Real estate funds (including infrastructure and timber) - - - 2,215 - - - 388 Hedge funds - - - 2,220 - - - 320 Total other funds - - - 12,527 - - - 2,057 Derivative assets/liabilities 4 (8) - (4) - (1) - (1) Other assets/liabilities, net b - - - 147 - - - 11 Total assets $ 5,226 $ 1,366 $ - $ 19,266 $ 885 $ 242 $ - $ 3,195 a. Investments measured at fair value using NAV have not been included under the fair value hierarchy. b. Includes receivables and payables carried at amounts that approximate fair value. Valuation Methods and Assumptions The following are general descriptions of asset categories, as well as the valuation methodologies and inputs used to determine the fair value of each major category of Plan assets. It is important to note that the investment amounts in the asset categories shown in the table above may be different from the asset category allocation shown in the Investment Strategy section of the note. Asset classes in the table above are grouped by the characteristics of the investments held. The asset class break-down in the Investment Strategy section is based on Management’s view of the economic exposures after considering the impact of derivatives and certain trading strategies. Debt securities Debt securities include discount notes, time deposits, securities purchased under resale agreements, U.S. treasuries and agencies, debt obligations of foreign governments, sub-sovereigns and debt obligations in corporations of domestic and foreign issuers. Debt securities also include investments in ABS such as collateralized mortgage obligations and MBS. These securities are valued by independent pricing vendors at quoted market prices for the same or similar securities, where available. If quoted market prices are not available, fair values are based on discounted cash flow models using market-based parameters such as yield curves, interest rates, volatilities, foreign exchange rates and credit curves. Some debt securities can be valued using techniques which require significant unobservable inputs. The selection of these inputs may involve some judgment. Management believes its estimates of fair value are reasonable given its processes for obtaining securities prices from multiple independent third-party vendors, ensuring that valuation models are reviewed and validated, and applying its approach consistently from period to period. Unless quoted prices are available, money market instruments and securities purchased under resale agreements are reported at face value which approximates fair value. Equity securities Equity securities (including REITs) represent investments in entities in various industries and countries. Investments in public equity listed on securities exchanges are valued at the last reported sale price on the last business day of the fiscal year. Commingled funds Commingled funds are typically collective investment vehicles, such as trusts that are reported at NAV as provided by the investment manager or sponsor of the fund based on the valuation of underlying investments. IBRD FINANCIAL STATEMENTS: JUNE 30, 2021 123 Private equity funds Private equity funds include investments primarily in leveraged buyouts, growth capital, distressed investments and venture capital funds across North America, Europe and Asia in a variety of sectors. Many of these funds are in the investment phase of their life cycle. Private Equity investments do not have a readily determinable fair value and are reported at NAV provided by the fund managers, taking into consideration the latest audited financial statements of the funds. Private credit funds Private credit funds include investments primarily in direct lending and opportunistic credit funds. Direct lending funds provide private financing to performing medium-size companies primarily owned by private equity sponsors. Opportunistic credit strategies (including distressed debt and multi-strategy funds) have flexible mandates to invest across both public and private markets globally. Private credit investments do not have a readily determinable fair value and are reported at NAV provided by the fund managers, taking into consideration the latest audited financial statements of the funds. Real estate funds (including infrastructure) Real estate funds include investments in core real estate, non-core real estate investments (such as debt, value add, and opportunistic equity investments) and infrastructure. Real estate investments do not have a readily determinable fair value and are reported at NAV provided by the fund managers, taking into consideration the latest audited financial statements of the funds. Hedge funds Hedge fund investments include those seeking to maximize absolute returns using a broad range of strategies to enhance returns and provide additional diversification. Hedge Funds include investments in equity, event driven, fixed income, multi strategy and macro relative value strategies. These investments do not have a readily determinable fair value and are reported at NAV provided by external managers or fund administrators (based on the valuations of underlying investments) monthly, taking into consideration the latest audited financial statements of the funds. Investments in hedge funds and commingled funds can typically be redeemed at NAV within the near term while investments in private equity and most real estate are inherently long term and illiquid in nature with a quarter lag in reporting by the fund managers. Since the reporting of those asset classes is done with a lag, management estimates are based on the latest available information considering underlying market fundamentals and significant events through the balance sheet date. Investment in derivatives Investment in derivatives such as equity or bond futures, TBA securities, swaps, options and currency forwards are used to achieve a variety of objectives that include hedging interest rates and currency risks, gaining desired market exposure of a security, an index or currency exposure and rebalancing the portfolio. Over-the-counter derivatives are reported using valuations based on discounted cash flow methods incorporating observable market inputs. Estimated Future Benefit Payments The following table shows the benefit payments expected to be paid in each of the next five years and subsequent five years. The expected benefit payments are based on the same assumptions used to measure the benefit obligation: Table J9: Expected benefit payments In millions of U.S. dollars SRP RSBP PEBP July 1, 2021 - June 30, 2022 $ 986 $ 84 $ 62 July 1, 2022 - June 30, 2023 997 92 63 July 1, 2023 - June 30, 2024 1,022 99 67 July 1, 2024 - June 30, 2025 1,051 106 71 July 1, 2025 - June 30, 2026 1,080 113 75 July 1, 2026 - June 30, 2031 5,912 678 458 124 IBRD FINANCIAL STATEMENTS: JUNE 30, 2021 Expected Contributions IBRD’s contribution to the SRP and RSBP varies from year to year, as determined by the PFC, which bases its judgment on the results of annual actuarial valuations of the assets and liabilities of the SRP and RSBP. The best estimate of the amount of contributions expected to be paid to the SRP and RSBP by IBRD and IDA during the fiscal year beginning July 1, 2021 is $185 million and $44 million, respectively. NOTE K—ACCUMULATED OTHER COMPREHENSIVE LOSS Comprehensive income consists of net income and other gains and losses affecting equity that, under U.S. GAAP, are excluded from net income. Other comprehensive income (loss) comprises currency translation adjustments on assets and liabilities denominated in euro; DVA on fair value elected liabilities; the cumulative effects of a change in accounting principle related to the implementation of U.S. GAAP requirements; and pension-related items. These items are presented in the Statement of Comprehensive Income. The following tables present the changes in Accumulated Other Comprehensive Loss (AOCL): Table K1: AOCL changes In millions of U.S. dollars 2021 Balance, Amounts Net Changes beginning of Changes reclassified into during the Balance, end of the fiscal year in AOCL net income period the period Cumulative Translation Adjustments on functional currency $ (106) $ 465 $ - $ 465 $ 359 DVA on Fair Value option elected liabilities 1,214 (1,377) (55) (1,432) (218) Unrecognized Net Actuarial (Losses) Gains on Benefit Plans (6,745) 4,727 378a 5,105 (1,640) Unrecognized Prior Service (Costs) Credits on Benefit Plans (89) - 23a 23 (66) Total AOCL $ (5,726) $ 3,815 $ 346 $ 4,161 $ (1,565) Table K1.1: In millions of U.S. dollars 2020 Balance, Amounts Net Changes beginning of Changes reclassified into during the Balance, end of the fiscal year in AOCL net income period the period Cumulative Translation Adjustments on functional currency $ (18) $ (88) $ - $ (88) $ (106) DVA on Fair Value option elected liabilities 705 538 (29) 509 1,214 Unrecognized Net Actuarial (Losses) Gains on Benefit Plans (3,678) (3,239) 172a (3,067) (6,745) Unrecognized Prior Service (Costs) Credits on Benefit Plans (112) - 23 a 23 (89) Total AOCL $ (3,103) $ (2,789) $ 166 $ (2,623) $ (5,726) Table K1.2: In millions of U.S. dollars 2019 Balance, Amounts Net beginning Adjusted reclassified Changes Balance, of the fiscal Cumulative beginning Changes in to net during the end of the year adjustment balance AOCL income period period Cumulative Translation Adjustment $ 139 $ - $ 139 $ (157) $ - $ (157) $ (18) DVA on Fair Value option elected liabilities - 155 155 551 (1) 550 705 Unrecognized Net Actuarial (Losses) Gains on Benefit Plans (2,423) - (2,423) (1,341) 86a (1,255) (3,678) Unrecognized Prior Service (Costs) Credits on Benefit Plans (136) - (136) - 24a 24 (112) Other (2) - (2) - 2 2 - Total AOCL $ (2,422) $ 155 $ (2,267) $ (947) $ 111 $ (836) $ (3,103) a. See Note J—Pension and Other Post Retirement Benefits. IBRD FINANCIAL STATEMENTS: JUNE 30, 2021 125 NOTE L—FAIR VALUE DISCLOSURES Valuation Methods and Assumptions As of June 30, 2021 and June 30, 2020, IBRD had no assets or liabilities measured at fair value on a non-recurring basis. Due from Banks The carrying amount of unrestricted and restricted currencies is considered a reasonable estimate of the fair value of these positions. Loans and Loan commitments There were no loans carried at fair value as of June 30, 2021 and June 30, 2020. IBRD’s loans and loan commitments would be classified as Level 3 within the fair value hierarchy. Summarized below are the techniques applied in determining the fair values of IBRD’s financial instruments. Investment securities Investment securities are classified based on management’s intention on the date of purchase, their nature, and IBRD’s policies governing the level and use of such investments. As of June 30, 2021, all of the financial instruments in IBRD’s investment portfolio were classified as trading. These securities are carried and reported at fair value, or at face value or NAV, which approximates fair value. Where available, quoted market prices are used to determine the fair value of trading securities. Examples include most government and agency securities, mutual funds, exchange-traded equity securities and ABS securities. For instruments for which market quotations are not available, fair values are determined using model-based valuation techniques, whether internally-generated or vendor-supplied, that include the standard discounted cash flow method using observable market inputs such as yield curves, credit spreads, and conditional prepayment rates. Where applicable, unobservable inputs such as conditional prepayment rates, probability of default and loss severity are used. Unless quoted prices are available, time deposits are reported at face value, which approximates fair value, as they are short term in nature. Securities purchased under resale agreements, Securities sold under repurchase agreements, and Securities lent under securities lending agreements These securities are of a short-term nature and reported at face value, which approximates fair value. Discount notes and vanilla bonds Discount notes and vanilla bonds issued by IBRD are valued using the standard discounted cash flow method which relies on observable market inputs such as yield curves, foreign exchange rates, basis spreads and funding spreads. Where available, quoted market prices are used to determine the fair value of short-term notes. Structured bonds Structured bonds issued by IBRD have coupon or repayment terms linked to the level or the performance of interest rates, foreign exchange rates, equity indices, catastrophic events or commodities. The fair value of the structured bonds is generally derived using the discounted cash flow method based on estimated future pay-offs determined by applicable models and computation of embedded optionality such as caps, floors and calls. A wide range of industry standard models such as one factor Hull-White, LIBOR Market Model and Black-Scholes are used depending on the specific structure. These models incorporate observable market inputs, such as yield curves, foreign exchange rates, basis spreads, funding spreads, interest rate volatilities, equity index volatilities and equity indices. Where applicable, the models also incorporate significant unobservable inputs such as correlations and long-dated interest rate volatilities. Generally, the movements in correlations are considered to be independent of movements in long-dated interest rate volatilities. Derivative instruments Derivative contracts include currency forward contracts, TBA securities, swaptions, exchange traded options and futures contracts, currency swaps and interest rate swaps. Currency swaps and interest rate swaps are either plain vanilla or structured. Currency forward contracts and plain vanilla currency and interest rate swaps are valued using the standard discounted cash flow methods using observable market inputs such as yield curves, foreign exchange rates, basis spreads and funding spreads. For structured currency and interest rate swaps, which primarily consist of callable swaps linked to interest rates, foreign exchange rates, and equity indices, valuation models and inputs similar to the ones applicable to structured bonds valuation are used. Where applicable, the models also incorporate significant unobservable inputs such as correlations and long-dated interest rate volatilities. 126 IBRD FINANCIAL STATEMENTS: JUNE 30, 2021 Valuation adjustments on fair value option elected liabilities The DVA on fair value option elected liabilities is measured by revaluing each liability to determine the changes in fair value of that liability arising from changes in IBRD’s cost of funding relative to LIBOR. The table below presents IBRD’s estimates of fair value of its financial assets and liabilities along with their respective carrying amounts: Table L1: Fair value and carrying amount of financial assets and liabilities In millions of U.S. dollars June 30, 2021 June 30, 2020 Carrying Value Fair Value Carrying Value Fair Value Assets Due from banks $ 2,347 $ 2,347 $ 1,870 $ 1,870 Investments-Trading (including Securities purchased under resale agreements) 87,904 87,904 84,161 84,161 Net loans outstanding 218,799 223,687 202,158 209,613 Derivative assets, net 3,355 3,355 3,744 3,744 Miscellaneous assets 50 50 - - Liabilities Borrowings 260,076 260,076 243,240 243,247 Securities sold/lent under repurchase agreements/securities lending agreements and payable for cash collateral received 62 62 36 36 Derivative liabilities, net 1,222 1,222 1,473 1,473 As of June 30, 2021, IBRD’s signed loan commitments were $59.8 billion ($54.8 billion—June 30, 2020) and had a fair value of $2.6 billion ($1.9 billion—June 30, 2020). IBRD FINANCIAL STATEMENTS: JUNE 30, 2021 127 The following tables present IBRD’s fair value hierarchy for assets and liabilities measured at fair value on a recurring basis. Note that the fair value of alternative investments and certain equities is calculated using NAV. As a result, these amounts are included in the respective asset class totals and not in the fair value hierarchy, in accordance with the permitted practical expedient under U.S. GAAP. Table L2: Fair value hierarchy of IBRD’s assets and liabilities In millions of U.S. dollars Fair Value Measurements on a Recurring Basis June 30, 2021 Level 1 Level 2 Level 3 Total Assets: Investments-Trading Government and agency obligations $ 21,325 $ 27,305 $ - $ 48,630 Time deposits 839 34,621 - 35,460 ABS - 1,710 - 1,710 Alternative investments a - - - 1,352 Equity securities 414 - - 414 Total Investments-Trading $ 22,578 $ 63,636 $ - $ 87,566 Securities purchased under resale agreements 63 275 $ - 338 Derivative Assets Currency swaps b - $ 8,314 $ 375 $ 8,689 Interest rate swaps - 9,820 241 10,061 Other c - - - - $ - $ 18,134 $ 616 $ 18,750 Less: Amounts subject to legally enforceable master netting agreements e 12,124 Cash collateral received 3,271 Derivative Assets, net $ 3,355 Miscellaneous assets 50 50 Liabilities: Borrowings $ - $ 255,482 $ 4,594 $ 260,076 Securities sold under repurchase agreements and securities lent under securities lending agreements d - 25 - 25 Derivative Liabilities Currency swaps b - 4,756 221 4,977 Interest rate swaps - 8,309 62 8,371 Other c 1 - - 1 $ 1 $ 13,065 $ 283 $ 13,349 Less: Amounts subject to legally enforceable master netting agreements f 12,127 Derivative Liabilities, net $ 1,222 a. Investments at NAV related to PEBP holdings, not included in the fair value hierarchy. b. Includes currency forward contracts and structured swaps. c. These relate to swaptions, exchange traded options and futures contracts and TBA securities. d. Excludes $3,308 million relating to payable for cash collateral received. e. Includes $18 million CVA. f. Includes $21 million DVA. 128 IBRD FINANCIAL STATEMENTS: JUNE 30, 2021 Table L2.1 In millions of U.S. dollars Fair Value Measurements on a Recurring Basis June 30, 2020 Level 1 Level 2 Level 3 Total Assets: Investments – Trading Government and agency obligations $ 19,368 $ 29,081 $ - $ 48,449 Time deposits 1,850 29,132 - 30,982 ABS - 3,012 - 3,012 Alternative investments a - - - 942 Equity securities 382 - - 382 Total Investments – Trading $ 21,600 $ 61,225 $ - $ 83,767 Securities purchased under resale agreements 53 341 $ - 394 Derivative Assets Currency swaps b - $ 5,916 $ 157 $ 6,073 Interest rate swaps - 14,154 141 14,295 Other c - 3 - 3 $ - $ 20,073 $ 298 $ 20,371 Less: Amounts subject to legally enforceable master netting agreements e 14,502 Cash collateral received 2,125 Derivative Asset, net $ 3,744 Liabilities: Borrowings $ - $ 237,893 $ 5,347 $ 243,240 Securities sold under repurchase agreements and securities lent under securities lending agreements d - 9 - 9 Derivative Liabilities Currency swaps b - 7,277 310 7,587 Interest rate swaps - 8,207 163 8,370 Other c - 2 - 2 $ - $ 15,486 $ 473 $ 15,959 Less: Amounts subject to legally enforceable master netting agreements f 14,486 Derivative Liabilities, net $ 1,473 a. Investments at NAV related to PEBP holdings, not included in the fair value hierarchy. b. Includes currency forward contracts and structured swaps. c. These relate to swaptions, exchange traded options and futures contracts and TBA securities. d. Excludes $2,152 million relating to payable for cash collateral received. e. Includes $28 million CVA. f. Includes $12 million DVA. IBRD’s Level 3 borrowings primarily relate to structured bonds. The fair value of these bonds is estimated using discounted cash flow valuation models that incorporate model parameters, observable market inputs, and unobservable inputs. The significant unobservable inputs used in the fair value measurement of structured bonds and swaps are correlations and long-dated market interest rate volatilities. Generally, the movements in correlations are considered to be independent of the movements in long-dated interest rate volatilities. Correlation is the statistical measurement of the relationship between two variables. For contracts where the holder benefits from the convergence of the underlying index prices (e.g., interest rates and foreign exchange rates), an increase in correlation generally results in an increase in the fair value of the instrument. The magnitude and direction of the fair value adjustment will depend on whether the holder is short or long the option. Interest rate volatility is the extent to which the level of interest rates changes over time. For purchased options, an increase in volatility will generally result in an increase in the fair value. In general, the volatility used to price the option depends on the maturity of the underlying instrument and the option strike price. In the fiscal years ended June 30, 2021, and June 30, 2020, the interest rate volatilities for certain currencies were extrapolated for certain tenors and, thus, are considered an unobservable input. In certain instances, particularly for instruments with coupon or repayment terms linked to catastrophic events, management relies on instrument valuations supplied by external pricing vendors. IBRD FINANCIAL STATEMENTS: JUNE 30, 2021 129 The following table provides a summary of the valuation technique applied in determining fair values of these Level 3 instruments and quantitative information regarding the significant unobservable inputs used. Level 3 instruments represent 2% of IBRD’s borrowings. Table L3: Level 3 Borrowings and derivatives valuation technique and quantitative information regarding the significant unobservable inputs: In millions of U.S. dollars Fair Value at Fair Value at Valuation Range (average), Range (average), Portfolio Unobservable input June 30, 2021 June 30, 2020 Technique June 30, 2021 June 30, 2020 Correlations -14% to 92% (13%) -55% to 76% (7%) Discounted Borrowings $4,594 $5,347 Interest rate Cash Flow 52% to 54% (53%) 37% to 412% (183%) volatilities Correlations -14% to 92% (13%) -55% to 76% (7%) Derivative Discounted $333 $(175) Interest rate assets/(liabilities) Cash Flow 52% to 54% (53%) 37% to 412% (183%) volatilities The table below provides the details of inter-level transfers between Level 2 and Level 3 that are due to changes in observable inputs. Table L4: Borrowings and derivatives inter level transfers In millions of U.S. dollars June 30, 2021 June 30, 2020 Level 2 Level 3 Level 2 Level 3 Borrowings Transfer into (out of) $ 63 $ (63) $ 466 $ (466) Transfer (out of) into - - (309) 309 $ 63 $ (63) $ 157 $ (157) Derivative assets, net Transfer into (out of) $ 9 $ (9) $ 26 $ (26) Transfer (out of) into - - (1) 1 9 (9) 25 (25) Derivative liabilities, net Transfer (into) out of $ (11) $ 11 $ - $ - Transfer out of (into) - - 9 (9) (11) 11 9 (9) Total Derivative Transfers, net $ (2) $ 2 $ 34 $ (34) The following table provides a summary of changes in the fair value of IBRD’s Level 3 borrowings and derivatives: Table L5: Borrowings Level 3 changes In millions of U.S. dollars June 30, 2021 June 30, 2020 Beginning of the fiscal year $ 5,347 $ 4,941 Issuances 409 1,541 Settlements (1,695) (953) Total realized/unrealized mark-to- market losses/gains in: Net income 512 72 Other comprehensive income 84 (97) Transfers to (from) Level 3, net (63) (157) End of the period $ 4,594 $ 5,347 130 IBRD FINANCIAL STATEMENTS: JUNE 30, 2021 Table L6: Derivatives Level 3 changes In millions of U.S. dollars June 30, 2021 June 30, 2020 Derivatives, Assets/(Liabilities) Derivatives, Assets/(Liabilities) Currency Interest Currency Interest Rate Swaps Rate Swaps Total Swaps Swaps Total Beginning of the fiscal year $ (153) $ (22) $ (175) $ (62) $ (120) $ (182) Issuances 2 1 3 (6) (79) (85) Settlements (23) (2) (25) 14 44 58 Total realized/unrealized mark- to-market losses/gains in: Net income 318 198 516 (52) 133 81 Other comprehensive income 8 4 12 (13) - (13) Transfers to (from) Level 3, net 2 - 2 (34) - (34) End of the period $ 154 $ 179 $ 333 $ (153) $ (22) $ (175) Information on the unrealized gains or losses included in the Statement of Income and Statement of Comprehensive income relating to IBRD’s Level 3 borrowings and derivatives that are still held at the reporting dates, is presented in the following table: Table L7: Unrealized gains or losses relating to IBRD’s Level 3 borrowings and derivatives In millions of U.S. dollars 2021 2020 2019 Reported as follows: Borrowings Net income (loss)a $ (449) $ (35) $ 14 Other comprehensive incomeb (92) 129 46 Derivatives Net income (loss)a 446 91 $ 28 Other comprehensive incomec $ 25 $ (41) $ 27 a. Amounts are included in Unrealized mark-to-market gains (losses) on non-trading portfolios, net, in the Statement of Income. b. Amounts are included in Currency translation adjustment on functional currency and Net Change in DVA on fair value option elected liabilities, in the Statement of Comprehensive Income. c. Amounts are included in Currency translation adjustment on functional currency, in the Statement of Comprehensive Income. Table L8: Borrowings fair value and contractual principal balance In millions of U.S. dollars Principal Amount Due Fair Value Upon Maturity Difference June 30, 2021 $ 260,076 $ 260,277 $ (201) June 30, 2020 $ 243,240 $ 238,674 $ 4,566 The following table provides information on the changes in fair value due to the change in IBRD’s own credit risk for financial liabilities measured under the fair value option, included in the Statement of Comprehensive Income: Table L9: Changes in fair value due to IBRD’s own credit risk In millions of U.S. dollars Unrealized mark-to-market (losses) gains due to DVA on fair value option elected liabilities June 30, 2021 June 30, 2020 DVA on Fair Value Option Elected Liabilities $ (1,377) $ 538 Amounts reclassified to net income upon derecognition of a liability (55) (29) Net change in DVA on Fair Value Option Elected Liabilities $ (1,432) $ 509 IBRD FINANCIAL STATEMENTS: JUNE 30, 2021 131 The following table provides information on the cumulative changes in fair value due to the change in IBRD’s own-credit risk for financial liabilities measured under the fair value option, as well as where those amounts are included on the Balance Sheet: Table L10: Cumulative changes in fair value due to the change in IBRD’s own credit risk In millions of U.S. dollars DVA on fair value option elected liabilities- (loss) gain June 30, 2021 June 30, 2020 Reported as follows: Accumulated other comprehensive loss $ (218) $ 1,214 Table L11: Unrealized mark-to-market gains or losses on investments-trading, and non-trading portfolios, net In millions of U.S. dollars Fiscal Year Ended June 30, 2021 Unrealized gains (losses) Realized gains Unrealized gains excluding realized (losses) (losses) amounts a Investments-Trading $ (672) $ 903 $ 231 Non-trading portfolios, net Loan derivatives—Note F - 2,415 2,415 Other asset/liability management derivatives, net - (1,351) (1,351) Borrowings, including derivatives—Notes E and F 14 140 154 b Client operations derivatives - 14 14 Total non-trading portfolios, net $ 14 $ 1,218 $ 1,232 In millions of U.S. dollars Fiscal Year Ended June 30, 2020 Unrealized gains (losses) Realized gains Unrealized gains excluding realized (losses) (losses) amounts a Investments-Trading $ 517 $ (324) $ 193 Non-trading portfolios, net Loan derivatives—Note F (14) (1,957) (1,971) Other asset/liability management derivatives, net - 1,204 1,204 Borrowings, including derivatives—Notes E and F 146 (362) (216) b Client operations derivatives 63 (22) 41 Total non-trading portfolios, net $ 195 $ (1,137) $ (942) In millions of U.S. dollars Fiscal Year Ended June 30, 2019 Unrealized gains (losses) Realized gains Unrealized gains excluding realized (losses) (losses) amounts a Investments-Trading $ 1,197 $ (747) $ 450 Non-trading portfolios, net Loan derivatives—Note F 1 (1,486) (1,485) Other asset/liability management derivatives, net - 1,084 1,084 Borrowings, including derivatives—Notes E and F 11 109 120 b Client operations derivatives - 15 15 Total non-trading portfolios, net $ 12 $ (278) $ (266) a. Adjusted to exclude amounts reclassified to realized gains (losses). b. Includes $7,209 million of unrealized mark-to-market losses related to derivatives associated with borrowings (unrealized mark-to- market gains of $5,478 million—June 30, 2020 and unrealized mark-to-market gains of $6,186 million—June 30, 2019). 132 IBRD FINANCIAL STATEMENTS: JUNE 30, 2021 NOTE M—CONTINGENCIES In light of the COVID-19 pandemic, IBRD faces additional credit, market and operational risks. The duration of the COVID- 19 pandemic is difficult to predict at this time, as are the extent and efficacy of economic interventions by governments and central banks. The length and severity of the pandemic and the related developments, as well as the impact on the financial results and position of IBRD in future periods cannot be reasonably estimated at this point in time and continues to evolve. IBRD continues to monitor the developments and to manage the risks associated with its various portfolios within existing financial policies and limits. From time to time, IBRD may be named as a defendant or co-defendant in legal actions on different grounds in various jurisdictions. The outcome of any existing legal action, in which IBRD has been named as a defendant or co-defendant, as of and for the fiscal year ended June 30, 2021, is not expected to have a material adverse effect on IBRD's financial position, results of operations or cash flows. IBRD FINANCIAL STATEMENTS: JUNE 30, 2021 133 International Development Association Management’s Discussion & Analysis and Financial Statements June 30, 2021 Management’s Discussion and Analysis Contents Section I: Executive Summary Summary of Financial Results 4 Section II: Overview Presentation 6 Introduction 6 Nineteenth Replenishment of Resources (IDA19) 6 Financial Business Model 6 Basis of Reporting 7 Section III: IDA’s Financial Resources IDA19 Funding 8 Allocation of IDA19 Resources 8 Section IV: Financial Results Summary of Financial Results 13 Section V: Development Activities, Products and Lending Framework 21 Programs Financial Terms 22 Loans, Grants and Guarantee Activity 24 Section VI: Other Development Activities and Guarantees 26 Programs Other Financial Products and Services 26 Grant Making Facilities 27 Debt Relief 27 Externally-Funded Activities 27 Section VII: Investment Activities Liquid Asset Portfolio 29 Investments - Non-Trading Portfolio 30 Section VIII: Borrowing Activities Concessional Partner Loans 31 Market Debt 31 Other Short-Term Borrowings 32 Contractual Obligations 32 Section IX: Risk Management Risk Governance 33 Risk Oversight and Coverage 33 Management of IDA’s Risks 35 Section X: Critical Accounting Policies and the Use Fair Value of Financial Instruments 46 of Estimates Provision for Losses on Loans and Other Exposures 46 Provision for HIPC Debt Initiative and MDRI 47 Section XI: Governance and Internal Controls Business Conduct 48 General Governance 48 Audit Committee 49 External Auditors 50 Senior Management Changes 50 Internal Controls 50 Appendix Glossary of Terms 51 List of Tables, Figures and Boxes 52 Management’s Discussion and Analysis Section I: Executive Summary This Management’s Discussion & Analysis (MD&A) discusses the results of the International Development Association’s (IDA) financial performance for the fiscal year ended June 30, 2021 (FY21). IDA undertakes no obligation to update any forward-looking statements. Certain reclassifications of prior years’ information have been made to conform with the current year’s presentation. For discussion of IDA’s financial results for the year ended June 30, 2020 as compared to the year ended June 30, 2019, see Section IV – Financial Results in IDA’s MD&A and Financial Statements for the fiscal year ended June 30, 2020. For information relating to IDA’s development operations’ results and corporate performance, refer to the World Bank Corporate Scorecard and Sustainability Review. Box 1: Selected Financial Data In millions of U.S. dollars, except ratios which are in percentages As of and for the fiscal years ended June 30, 2021 2020 2019 2018 2017 Lending Highlights (Sections IV & V) Loans, Grants and Guarantees Net commitments a $ 36,028 $ 30,365 $ 21,932 $ 24,010 $ 19,513 a Gross disbursements 22,921 21,179 17,549 14,383 12,718 Net disbursements a 16,465 15,112 12,221 9,290 8,154 Balance Sheet (Section IV) Total assets $ 219,324 $ 199,472 $ 188,553 $ 184,666 $ 173,357 Net investment portfolio b 37,921 35,571 32,443 33,735 29,673 Net loans outstanding 177,779 160,961 151,921 145,656 138,351 c Borrowing portfolio 28,335 19,653 10,149 7,318 3,660 Total equity 180,876 168,171 162,982 163,945 158,476 Income Statement (Section IV) Interest revenue, net of borrowing expenses $ 1,996 $ 1,843 $ 1,702 $ 1,647 $ 1,521 Transfers from affiliated organizations and others 544 252 258 203 599 Development grants (2,830) (1,475) (7,694) (4,969) (2,577) Net loss (433) (1,114) (6,650) (5,231) (2,296) Non-GAAP Measures: Adjusted Net Income (Loss) (Section IV) $ 394 $ 724 $ 225 $ (391) $ (158) Capital Adequacy (Section IX) Deployable Strategic Capital Ratio 30.4% 35.8% 35.3% 37.4% 37.2% a. Commitments that have been approved by the Executive Directors (referred to as “the Board” in this document) and net of full cancellations / terminations approved in the same fiscal year. Commitments and disbursements exclude IFC-MIGA Private Sector Window (PSW) activities. b. For composition of net investment portfolio, see Notes to the Financial Statements, Note C – Investments – Table C2. c. Includes associated derivatives. 2 IDA Management’s Discussion and Analysis: June 30, 2021 Management’s Discussion and Analysis Section I: Executive Summary Section I: Executive Summary Owned by its 173 members, IDA, an entity rated triple-A by the major rating agencies, and one of the five institutions of the World Bank Group (WBG 1), has been providing financing and knowledge services to many of the world’s developing countries for 60 years. Each organization is legally and financially independent from IDA, with separate assets and liabilities, and IDA is not liable for their obligations. With its many years of experience and its depth of knowledge in the international development arena, IDA plays a key role in achieving the WBG goal of helping countries achieve better development outcomes. IDA contributes to the WBG’s twin goals of ending extreme poverty and promoting shared prosperity by providing loans, grants, and guarantees to countries to help meet their development needs and by leveraging its experience and expertise to provide technical assistance and policy advice. It also supports countries with disaster risk financing and insurance against natural disasters and health-related crises and facilitates financing through trust fund partnerships. IDA and its affiliated organizations seek to help countries achieve improvements in growth, job creation, poverty reduction, governance, the environment, climate adaptation and resilience, human capital, infrastructure, and debt transparency. To meet its development goals, the WBG has been increasing its focus on country programs in order to improve growth and development outcomes. The World Bank’s operational realignment, which came into effect on July 1, 2020, places country-driven development at the center of the delivery model, while strengthening thought leadership on development issues of critical importance to sustainable growth and poverty alleviation. Support continues to be prioritized for countries at lower levels of income, and fragile and conflict-affected states. The realignment strengthens the focus on Africa by creating two Vice Presidencies, one focused on Western and Central Africa and the other on Eastern and Southern Africa. In March 2020, IDA’s Nineteenth Replenishment of Resources (IDA19) was approved by the Board of Governors. The IDA19 financing framework is an integrated package that will continue to leverage IDA’s strong equity base. The first year of the implementation of IDA19 commenced in FY21 which coincided with the onset of the coronavirus disease (COVID-19) crisis. In order to enable IDA to continue meeting the heightened financing needs for IDA resources, IDA members agreed in April 2021 to launch the twentieth IDA replenishment (IDA20), which will commence one year earlier, in FY23. The IDA19 implementation period will be shortened to two years (FY21-FY22), and $12.5 billion of resources originally projected for use in FY23 will be available for financing in FY22. In response to the global outbreak of COVID-19 and to support global public goods, IDA has been working in solidarity with partners at global and country levels to support its borrowing countries. A significant portion of the FY21 commitments supported COVID-19 related efforts. IDA’s operational response includes three stages: a) Relief stage that involves emergency response to the health threat, b) Restructuring stage that focuses on strengthening health systems, restoring human capital, and restructuring of firms and sectors, and c) Resilient recovery stage that entails new opportunities to build a more sustainable, inclusive and resilient future. Each stage is structured through four thematic crisis response pillars: i) Saving lives, ii) Protecting the poor and vulnerable, iii) Ensuring sustainable business growth and job creation, and iv) Strengthening policies, institutions, and investment for rebuilding better. 1 The other WBG institutions are the International Bank for Reconstruction and Development (IBRD), the International Finance Corporation (IFC), the Multilateral Investment Guarantee Agency (MIGA), and the International Centre for Settlement of Investment Disputes (ICSID). IDA Management’s Discussion and Analysis: June 30, 2021 3 Management’s Discussion and Analysis Section I: Executive Summary Summary of Financial Results Net Loss and Adjusted Net Income In millions of U.S. dollars Net Loss: For the fiscal year ended June 30, 2021, IDA reported a Adjusted Net Income (Loss) net loss of $433 million, compared to a net loss of $1,114 million in Net Income (Loss) FY20. The decrease was primarily driven by the increase in 8,000 unrealized mark-to-market gains on the non-trading portfolios partially offset by an increase in development grant expenses during 4,000 the year. See Section IV: Financial Results. 0 Adjusted Net Income: For the fiscal year ended June 30, 2021, (4,000) IDA’s adjusted net income was $394 million, a decrease of $330 million from the prior year ($724 million). The decrease was (8,000) primarily due to lower net investment revenue and higher provision FY17 FY18 FY19 FY20 FY21 for losses on loans and other exposures, partially offset by higher net interest revenue on loans. See Section IV: Financial Results. Lending Operations IDA made $36.0 billion of net commitments in FY21, of which $23.9 billion were loan and guarantee commitments. The remainder were grant commitments, which are recorded as an expense in IDA’s Statement of Income once all conditions are met, generally at the time of disbursement. The FY21 net commitments reflected the strong support IDA provided to its client countries during the COVID pandemic including $2.5 billion of newly approved financing for vaccines as of June 30, 2021, benefiting 41countries. IDA’s net loans outstanding increased by $16.8 billion, to $177.8 billion as of June 30, 2021, from $161.0 billion as of June 30, 2020. See Section IV: Financial Results. The decrease in development grant expenses from FY19 to FY20 was due to the timing of the recognition of the grant expenses as a result of the implementation of a new accounting standard in FY20. In billions of U.S. dollars a Net Commitments Net Loans Outstanding Net Grant Commitments Gross Disbursements Grant Expense 200 Net Disbursements 40 160 40 32 120 32 24 24 80 16 16 8 40 8 0 0 0 FY17 FY18 FY19 FY20 FY21 Jun 17 Jun 18 Jun 19 Jun 20 Jun 21 FY17 FY18 FY19 FY20 FY21 a. Includes loans, grants, and guarantees Net Investment Portfolio In billions of U.S. dollars Net Investment Portfolio As of June 30, 2021, the net investment portfolio was $37.9 billion, compared with $35.6 billion as of June 30, 2020. See Section VII: 75 Investment Activities. The primary objective of IDA’s investment 60 strategy is principal protection. As of June 30, 2021, 68% of IDA’s 45 investment portfolio was held in instruments rated AA or above (See Table 30). 30 15 0 Jun 17 Jun 18 Jun 19 Jun 20 Jun 21 4 IDA Management’s Discussion and Analysis: June 30, 2021 Management’s Discussion and Analysis Section I: Executive Summary Borrowing Portfolio In billions of U.S. dollars Borrowing portfolio Market borrowings: As of June 30, 2021, the total market borrowings portfolio outstanding was $20.6 billion, an increase of 75 $8.6 billion compared with June 30, 2020 ($12.0 billion). See 60 Section IV: Financial Results. 45 Concessional Partner Loans: As of June 30, 2021, total borrowings 30 from members - concessional partner loans (CPLs) - were $7.7 15 billion, an increase of $0.1 billion compared with June 30, 2020 ($7.6 billion). See Section IV: Financial Results. 0 Jun 17 Jun 18 Jun 19 Jun 20 Jun 21 Equity and Capital Adequacy In billions of U.S. dollars As of June 30, 2021, IDA’s equity was $180.9 billion, an increase of Equity $12.7 billion from June 30, 2020. See Section IV: Financial Results. 200 150 100 50 0 Jun 17 Jun 18 Jun 19 Jun 20 Jun 21 The Deployable Strategic Capital (DSC) ratio, IDA’s main capital Ratio in percentages adequacy measure, was 30.4% as of June 30, 2021, above the zero Deployable Strategic Capital Ratio percent policy minimum. The decrease of 5.4 percentage points from 45% June 30, 2020 is primarily driven by a refinement of the DSC framework during FY21 which includes additional capital 30% requirements for approved but not yet expensed grants. While grants are now expensed at disbursement rather than commitment under an accounting standard, IDA has now taken the grants into account 15% Minimum Ratio = 0% upon commitment, consistent with prior practice. IDA’s capital continues to be adequate to support its operations. See Table 27. 0% Jun 17 Jun 18 Jun 19 Jun 20 Jun 21 IDA Management’s Discussion and Analysis: June 30, 2021 5 Management’s Discussion and Analysis Section II: Overview Section II: Overview Presentation This document provides Management’s Discussion and Analysis of the financial condition and results of operations for IDA for the fiscal year ended June 30, 2021. A Glossary of Terms is provided at the end of this document. Introduction Generally every three years, representatives of IDA’s members 2 meet to assess IDA’s financial capacity and the medium-term demand for new IDA financing. Members decide on the policy framework, agree upon the amount of financing to be made available for the replenishment period, and commit to additional contributions of equity that are required to meet these goals. The meetings culminate in a replenishment agreement that determines the size, sources (both internal and external), and uses of funds for the replenishment period. Nineteenth Replenishment of Resources (IDA19) IDA19 supports the world’s poorest and most vulnerable countries to implement country -driven solutions that generate growth, are people-centered, and strengthen resilience. IDA19 builds on IDA18 development themes, including creating jobs, focusing on the poorest countries, including Fragile, Conflict and Violent (FCV) states, promoting low carbon enabling environment and investments, gender, and governance. IDA19’s policy package incorporates four additional crosscutting issues: debt (including transparency); digital technology and connectivity; investing in people; and disability inclusion. Members agreed that IDA would make $82.0 billion 3 in new commitments over the replenishment period, backed by $27.4 billion in new member contributions, including compensation for the Multilateral Debt Relief Initiative (MDRI). Since the onset of the COVID-19 crisis, IDA has significantly scaled up its financial support, serving clients and targeting resources to those most in need. In recognition of the heightened financing needs of IDA countries and to make additional resources available to them to respond to, and recover from the COVID-19 crisis, IDA members agreed in April 2021 to launch the twentieth IDA replenishment (IDA20) one year early, to commence in FY23. The IDA19 implementation period will be shortened to two years (FY21-FY22), and $12.5 billion of resources originally projected for use in FY23 will be available for financing in FY22. The IDA19 financing framework has been adjusted to make $71.3 billion of resources available, of a total original IDA19 commitment authority of $82.0 billion, all on standard IDA terms. The remaining $10.7 billion will be carried forward to be utilized in the replenishment period of IDA20. Financial Business Model IDA has financed its operations over the years with its own equity, including regular additions to equity provided by member countries as part of the replenishment process. As a result of the strong support of member countries, IDA has built up a substantial equity base, amounting to $180.9 billion as of June 30, 2021. In FY15, IDA introduced debt to its financial model with concessional partner loans received from certain member countries. In FY18, IDA introduced a hybrid financing model by including market debt into its business model. By prudently leveraging its equity and blending market debt with equity contributions from members, IDA has increased its financial efficiency, and scaled up its financing to support the escalating demand for its resources to deliver on the following priorities: • Retain IDA’s mandate to provide concessional financing on terms that respond to clients’ needs; and • Ensure long-term financial sustainability of IDA’s financial model through a prudent risk management framework. 2 IDA’s members are owners and hold voting rights in IDA. Members do not, however, hold shares in IDA and are therefore not ref erred to as shareholders. Payments for subscriptions and contributions from members increase IDA’s paid-in equity and are financially equivalent to paid-in capital in multilateral development organizations that issue shares. 3 U.S. dollar amounts are based on an IDA19 reference rate of USD/SDR 1.38318. The U.S. dollar amounts are provided for reporting purposes only, as IDA’s balance sheet is predominantly managed in Special Drawing Rights (SDR). 6 IDA Management’s Discussion and Analysis: June 30, 2021 Management’s Discussion and Analysis Section II: Overview Concessional lending, including grants, is primarily financed by IDA’s equity. Non-concessional lending will primarily be financed by market debt. To the extent that market debt will be used to finance concessional lending, it will be blended with member contributions (equity). See Figure 1. Figure 1: IDA's Financial Business Model Reflows and Operating Equity Concessional Lending and Grants Results Investments Borrowings Non – Concessional Lending Basis of Reporting IDA prepares its financial statements in conformity with accounting principles generally accepted in the United States of America (U.S. GAAP). IDA’s functional currencies are the SDR and its component currencies of U.S. dollar, euro, Japanese yen, pound sterling and Chinese renminbi. For the convenience of its members and other users, IDA’s financial statements are reported in U.S. dollars. Management uses net income as the basis for deriving adjusted net income, as discussed in Section IV: Financial Results. Adjusted Net Income Adjusted Net Income (ANI), a non-GAAP measure, reflects the economic results of IDA’s operations and is used by IDA’s management and the Board as a financial sustainability measure. ANI is defined as IDA’s net income , adjusted to exclude certain items. After the effects of these adjustments, the resulting ANI generally reflects amounts which are realized, not restricted for specific uses, and not directly funded by members. For a detailed discussion of the adjustments, see Section IV: Financial Results. IDA Management’s Discussion and Analysis: June 30, 2021 7 Management’s Discussion and Analysis Section III: IDA’s Financial Resources Section III: IDA’s Financial Resources IDA’s replenishments have grown from $1.0 billion for the initial replenishment to $82.0 billion in IDA19. Members’ subscriptions and contributions receivable for each replenishment are settled through payment of cash or deposit of nonnegotiable, non-interest-bearing demand notes which become due throughout the replenishment period, generally three years. The notes are encashed by IDA on a pro rata basis over a 9 to 11-year period which generally corresponds with the disbursement period of the loans and grants. IDA19 Funding IDA’s financing resource envelope available for lending and grant commitments is based on the long -term outlook of IDA’s financial sustainability. This takes into account the amount of member contributions and the concessionality of the proposed financing to borrowers, market conditions, and capital adequacy requirements. Allocation of IDA19 Resources IDA financing is provided in the form of loans, grants, and guarantees. Most of IDA ’s resources are allocated to eligible members through IDA Country Allocations that provide unearmarked support. IDA Country Allocations are determined using the Performance Based Allocation (PBA) system, which takes into account the country’s performance rating (CPR), population size and per capita income, and complemented by the FCV envelope. The rest of IDA support is provided through five IDA Windows dedicated to addressing specific development priorities, and an Arrears Clearance Set-Aside that provides exceptional support for countries to fully reengage with the World Bank. The allocation framework is agreed for each replenishment cycle. IDA responds to specific needs of its members through the following five IDA Windows: Table 1: Adjusted IDA19 Resource Allocation In billions of U.S. dollars Allocation USD equivalent a Country Allocation Envelope $ 56.0 IDA Concessional Windows 10.4 Non-concessional Window 3.2 Private Sector Window 1.7 Total IDA19 Allocation $ 71.3 a. U.S. dollar amounts are based on IDA19 reference rate of USD/SDR 1.38318. The U.S. dollar amounts are provided for illustrative purposes only. 8 IDA Management’s Discussion and Analysis: June 30, 2021 Management’s Discussion and Analysis Section III: IDA’s Financial Resources Table 2: Cumulative Net Commitments under IDA19 In millions of U.S. dollars Loans and As of June 30, 2021 Grants Total Guarantees Concessional financing IDA Country Allocations $ 20,476 $ 9,171 $ 29,647 IDA Concessional Windows Regional Window 1,171 1,002 2,173 Window for Host Communities and Refugees - 628 628 Crisis Response Window 445 320 765 Arrears Clearance - 1,000 1,000 Non-concessional financing 1,815 - 1,815 Total Net Commitments a $ 23,907 $ 12,121 $ 36,028 a. Commitments are net of full cancellations/terminations approved in the same fiscal year. Commitments exclude IFC-MIGA Private Sector Window (PSW) activities Eligibility for IDA’s resources is determined primarily by a member’s relative poverty. Relative poverty is defined as Gross National Income (GNI) per capita below an established threshold and is updated annually. For FY22, the threshold is $1,205 (FY21: $1,185). As of July 1, 2021, 74 countries are eligible to borrow from IDA on concessional terms as follows: IDA-only 41 countries that (a) have not exceeded the IDA operational cut-off GNI per capita for more than two consecutive years; and (b) are not creditworthy to borrow from IBRD. This includes: 11 Small Island Economies that have per capita incomes above the IDA operational cut-off for more than two consecutive years, but that have been granted the status of an “IDA-only Country” under the Small Island Economies Exception. 2 countries with loans in nonaccrual status, which were classified as “IDA-only” at the time they became nonaccrual countries. IDA eligible countries Gap 16 countries that are (a) determined by IDA to be eligible for IDA financing; (b) determined by IDA to have a GNI per capita that has exceeded the cut-off for IDA eligibility for more than two consecutive years; and (c) not currently determined by IBRD to be creditworthy to borrow from IBRD. This includes 3 Small States that are not island states. Blend 14 countries that are determined: (a) by IDA to be eligible for IDA financing; and (b) by IBRD to be creditworthy for borrowing IBRD loans. This includes 6 Small Island Economies and 1 Small State that is not an island state. 1 country with loans in nonaccrual status, which was classified as “Blend” at the time it became a nonaccrual country. Allocation - Performance Based Allocation (PBA) System IDA’s resources are allocated to eligible members, using its PBA system and the allocation framework agreed during each replenishment. These allocations depend on several factors: the overall availability of IDA’s resources, individual country needs, their policy performance and institutional capacity, and each country’s performan ce relative to others. The PBA system is designed to provide resources where they are likely to be most helpful in reducing poverty. Under the PBA, the main factor that determines the allocation of IDA’s core concessional resources among eligible countries is their performance in the Country Policy and Institutional Assessment (CPIA). The CPIA reflects the results of an exercise that rates eligible countries against a set of criteria including economic management; structural policies; policies for social inclusion and equity; and public-sector management and institutions. The CPIA and portfolio performance together constitute the IDA Country Performance Rating (CPR). In addition to the CPR, population, and per capita income are factored into a country’s allocation, along with the annual base allocation (SDR15 million per country). In addition, country allocations provide the FCV envelope to enhance support for eligible countries facing different FCV risks. The Sustainable Development Finance Policy (SDFP), which became effective at the beginning of IDA19, aims to incentivize IDA-eligible countries to move towards transparent, sustainable financing and to promote coordination between IDA and other creditors in support of these countries’ efforts to address their debt-related vulnerabilities. A set-aside from or a discount of IDA’s country allocation are used to incentivize satisfactory implementation of Performance and Policy Actions (PPAs). Countries which demonstrate IDA Management’s Discussion and Analysis: June 30, 2021 9 Management’s Discussion and Analysis Section III: IDA’s Financial Resources satisfactory progress in implementing their PPAs have access to their full annual country allocation. Countries that do not satisfactorily implement their PPAs will either have a share of their country allocation set aside or their country allocation will be reduced. In recognition of the change in IDA’s business model starting in IDA18, and to ensure that its lending decisions are compatible with the capital adequacy requirements of a triple-A rating, the allocation framework for IDA19 is aligned with the Single Borrower Limit (SBL) and capital adequacy requirements under the DSC Framework, see Section IX: Risk Management. Concessional Financing Concessional financing is provided in the form of loans, grants and guarantees. Eligibility and percentage of allocation for grants for IDA-only countries is based on an assessment of the country’s risk of debt distress, where the higher the risk assessment, the greater the proportion of grant financing. Gap and Blend countries are only eligible for grant financing via the Window for Host Communities and Refugees, if applicable. Country Allocation Envelope represents $56.0 billion of the adjusted IDA19 resource envelope and is allocated based on the PBA. The amount available for each country is a function of the country’s CPR rating, population, and per capita income, complemented by the FCV envelope. IDA Concessional Windows allow IDA to respond to specific needs of its members. In IDA19, $10.4 billion of the adjusted IDA19 resource envelope will be used to fund the following windows. • $5.6 billion of Regional Window; • $1.3 billion of Window for Host Communities and Refugees; • $2.5 billion of Crisis Response Window; • $1.0 billion of Arrears Clearance Set- Aside (Arrears Clearance Framework). Regional Window The Regional Window was developed as a funding mechanism to provide additional resources to finance projects that help low‐income countries achieve their regional integration objectives. IDA fosters regional integration by playing three overlapping roles: • supporting an enabling environment through advisory and analytical work; • financing projects through policy and investment loans; and • convening state and nonstate actors for coordination and collective actions. Window for Host Communities and Refugees (WHR) The Window for Host Communities and Refugees will support operations that promote medium-to long-term development opportunities for refugee and host communities in IDA countries. The purpose of the WHR is to support refugee hosting countries to: • create social and economic development opportunities for refugee and host communities; • facilitate solutions that include sustainable socio-economic inclusion of refugees in the host country and/or their return to the country of origin; and • strengthen country preparedness for increased or potential new refugee flow. Crisis Response Window The primary objective of the CRW is to provide IDA countries with additional resources that will help them to respond to major natural disasters, or public health emergencies and severe economic crises, so that they can return to their long-term development paths. The $2.5 billion window under the adjusted IDA19 resource envelope includes an allocation of up to $1.0 billion under the CRW Early Response Financing (ERF) which will support IDA countries’ response to slower-onset crises, namely disease outbreaks and food insecurity. Arrears Clearance Framework IDA has a policy of not providing financing to borrowers who are overdue on their payments to IDA or IBRD. However, it may engage with these countries under limited and clearly defined circumstances. IDA’s arrears clearance 10 IDA Management’s Discussion and Analysis: June 30, 2021 Management’s Discussion and Analysis Section III: IDA’s Financial Resources framework sets out these circumstances, including (i) pre-arrears clearance grants; and (ii) the arrears clearance set- aside, that can only be financed under the arrears clearance operations. (i) Pre-Arrears Clearance Grants (PACG) The PACG mechanism enables IDA to engage early in support of a government undertaking convincing reforms. This was first introduced in IDA12 to be used to finance high priority activities related to the preparation of a program of social and economic recovery and to build resilience until the arrears are fully cleared. Conditions constituting this framework include indications that: • early performance is promising as evidenced by the recipient country having taken convincing steps towards social and economic recovery; • arrears to IDA and/or IBRD are large and protracted, and cannot be easily or quickly cleared using domestic resources; • a concerted international effort to provide positive financial flows and other assistance is underway, and other creditors have agreed not to make net withdrawals of financial resources from the country; • alternative sources of financing for post-conflict recovery are inadequate or available only on inappropriate terms; and • Pari passu sharing arrangements are in place between preferred creditors, for any payments made by the country in advance of arrears clearance. The PACG program has met its objectives with each of the prior PACG recipients successfully clearing all their arrears to IDA and subsequently remaining current on their obligations. Prior PACG recipients are Democratic Republic of the Congo, Cote d’Ivoire, Afghanistan, Liberia, Myanmar, and Somalia, for an amount totaling $702 million between FY01 and FY20. In FY21, PACGs for Sudan for an amount of $410 million were approved to support the country’s reform momentum towards Heavily Indebted Poor Countries (HIPC) Decision Point. Of this amount, $100 million had been disbursed and expensed. (ii) Arrears Clearance Set-Aside The arrears clearance set-aside (ACSA) forms part of IDA’s overall financing commitments. It is financed by additional member contributions under the replenishments. In IDA15, the arrears clearance was further enhanced. IDA members agreed to ring-fence arrears clearance support to IDA countries that were in arrears as of December 31, 2006 and meet a very narrow and well-defined set of criteria– see below, including eligibility for support under the HIPC initiative. Amounts were set aside within the IDA replenishment so that when circumstances allow, IDA would be able to help countries clear arrears and fully re-engage with the World Bank. To be considered for any arrears clearance support, the country would need to meet the following criteria: • be eligible for HIPC debt relief; • agree to implement a medium-term growth-oriented reform program endorsed by the World Bank; • ensure a sustainable macro and sustainable debt service after arrears clearance; • agree on a stabilization program endorsed by the International Monetary Fund (IMF) management and monitored by IMF staff or supported by an IMF arrangement; and • agree to a financing plan for full clearance of arrears, including normalization with other Multilateral Development Banks (MDBs). In addition, to receive support for arrears clearance, project proposals should meet re-engagement criteria based on facts and circumstances of each case. On March 25, 2021, Sudan paid all of the overdue principal and charges due to IDA and the outstanding loans remaining to Sudan were restored to accrual status on that date. For more details, see Notes to the Financial Statements for the year ended June 30, 2021, Note D – Loans and Other Exposures. During FY21, $1.3 billion of development grants were approved and disbursed to Sudan in support of the re-engagement and reform development policy financing, of which $1.0 billion was under arrears clearance set-aside. IDA Management’s Discussion and Analysis: June 30, 2021 11 Management’s Discussion and Analysis Section III: IDA’s Financial Resources Non-Concessional Financing Non-Concessional financing comprises loans and guarantees whose terms are aligned with those of IBRD’s flexible loans and guarantees. Under the adjusted IDA19 resource envelope, $3.2 billion of resources have been allocated to non-concessional financing which entirely relates to the Scale-up Window. Scale-up Window: The Scale-up Window is a window of resources established to enhance support for high-quality, transformational, country-specific and/or regional operations with strong development impact. Allocation of Scale-up Window resources to the regions will broadly conform to the allocations under the PBA, excluding countries at a high risk of debt distress. Allocations are balanced between IDA-only and blend countries, and to avoid countries from having a concentration of Scale-up Window resources. Implementation arrangements will prioritize a country’s ability to absorb resources and the proposed projects’ alignment with IDA1 9 policy priorities and the debt-related Sustainable Development Finance Policy. Private Sector Window (PSW) In IDA19, an initial $2.5 billion IFC-MIGA Private Sector Window was created with the goal of mobilizing private sector investment in IDA-only countries and IDA-eligible Fragile and Conflict-affected States. Under the adjusted IDA19 resource envelope, the allocation was revised to $1.7 billion. PSW is deployed through four facilities. These facilities have been designed to target critical challenges faced by the private sector in these difficult markets and will leverage IFC and MIGA’s business platforms and instruments. During FY21, $595 million of the IDA19 resources, net of full terminations and cancellations, were committed. As of June 30, 2021, $630 million has been utilized out of a total of $2.0 billion committed in IDA18 and IDA19. See Notes to the Financial Statements for the year ended June 30, 2021, Note G –Transactions with Affiliated Organizations – Table G4. Table 3: Utilization of PSW Commitments In millions of U.S. dollars As of June 30, 2021 Guarantees $ 484 Face value of outstanding guarantees Derivatives 90 Notional amount Funding of IFC's PSW- related equity investments 46 Amortized cost Loans 10 Amortized cost Total utilization of IDA PSW $ 630 12 IDA Management’s Discussion and Analysis: June 30, 2021 Management’s Discussion and Analysis Section IV: Financial Results Section IV: Financial Results Summary of Financial Results IDA had a net loss of $433 million in FY21 compared with a net loss of $1,114 million in FY20 (See Table 4). The decrease in net loss was primarily driven by: • $1.1 billion of unrealized mark-to-market gains on non-trading portfolios in FY21 ($0.7 billion unrealized mark-to-market losses in FY20). In FY21, the gains were primarily from the Capital Value Protection Program (CVP) portfolio, due to the upward movement in U.S. dollar interest rates; • $0.4 billion increase in the release of provision for losses on loans and other exposures mainly due to a release of $0.8 billion of loan loss provision due to Sudan’s arrears clearance; partially offset by, • $1.4 billion increase in development grant expenses primarily due to the disbursement of $1.3 billion of development grants to Sudan in support of the re-engagement and reform program after its arrears clearance. Adjusted Net Income Adjusted Net Income, a non-GAAP measure, reflects the economic results of IDA’s operations and is used by IDA’s management and the Board as a financial sustainability measure. ANI is defined as IDA’s net income, adjusted to exclude the following items. • Development financing activities directly funded by contributions from members: These mainly comprise of development grants, provision for HIPC / MDRI debt relief, and amortization of discounts on CPL. For financial reporting, these activities are treated as expenses, while contributions from members which finance these activities, are reflected directly in IDA’s equity since they carry voting rights. • Contributions/grants received from affiliated organizations or other similar contributions: These mainly comprise contributions from IBRD, IFC and other contributions from trust funds. These are intended to finance development activities similar to member contributions but are not directly included in equity as they do not carry voting rights. • Non-functional currency translation adjustment (gains) losses: These represent unrealized exchange rate gains/losses resulting from the translation of loans, borrowings, development grants payable and all other assets and liabilities still held on IDA’s Balance Sheet, that are denominated in currencies other than the component currencies of SDR. • Unrealized mark-to-market gains/losses on non-trading portfolios: These mainly comprise unrealized mark-to- market gains and losses on the asset/liability management (ALM), borrowing, and non-trading investment portfolios. For the purpose of ANI, the result of loan revenue hedges is not part of the adjustment related to unrealized mark-to-market gains/losses on non-trading portfolio since the objective of the loan revenue hedges is to stabilize IDA’s revenue against any currency risk. • Pension, Post-Employment Benefit Plan (PEBP) and Post-Retirement Contribution Reserve (PCRF) adjustments: While IDA is not a participating sponsor to these benefit plans, IDA shares in the costs and reimburses IBRD for its proportionate share of any contributions made to these plans by IBRD, as part of a Board-approved cost sharing ratio. The Pension adjustment reflects the difference between IDA’s share of cash contributions to both the pension plans and PCRF, and the accounting expense, as well as the investment revenue earned on those assets related to the PEBP and PCRF. The PCRF was established by the Board to stabilize contributions to the pension and post-retirement benefits plans. Management has designated the income from these assets to meet the needs of the pension plans. As a result, PEBP and PCRF investment revenue is excluded from adjusted net income. • Other Adjustments: Under certain arrangements (such as Externally Funded Outputs (EFOs)), IDA receives a share of the revenue earned from agreements with donors under which funds received are to be used to finance specified outputs or services. These funds may be utilized only for the purposes specified in the agreements and are therefore considered contractually restricted until applied for these purposes. Income attributable to these arrangements is excluded from reported income when determining adjusted net income since there is no discretion about the use of these funds. IDA Management’s Discussion and Analysis: June 30, 2021 13 Management’s Discussion and Analysis Section IV: Financial Results IDA’s adjusted net income was $394 million in FY21 compared with $724 million in FY20 (See Table 4). The decrease was primarily driven by: • $275 million decrease in net interest revenue on investments due to lower interest rate environment during the year; • $40 million of unrealized mark-to-market losses on investments-trading, excluding IDA’s share of PEBP returns, in FY21, compared to $187 million of unrealized mark-to-market gains in FY20, reflecting the increase in yield curves during the year; • $253 million increase in provision for losses on loans and other exposures, excluding provision for debt relief under HIPC/MDRI; partially offset by, • $366 million increase in net interest revenue on loans, mainly driven by the recognition of $244 million of service charge revenue when Sudan paid all the overdue principal and service charges due to IDA. Table 4: Condensed Statement of Income In millions of U.S. dollars Negative Positive For the fiscal year ended June 30, 2021 2020 Impact Impact Interest Revenue Loans, net $ 2,050 $ 1,684 Investments, net 147 422 Asset/liability management derivatives, net (14) (22) Borrowing expenses, net (187) (241) Interest Revenue, net of borrowing expenses $ 1,996 $ 1,843 Provision for losses on loans and other exposures, release 539 170 Other revenue (expenses), net (Table 11) 56 (10) Net non-interest expenses (Table 10) (1,612) (1,508) Transfers from affiliated organizations and others 544 252 Non-functional currency translation adjustment (losses) gains, net (372) 95 Unrealized mark-to-market gains on investments-trading portfolio, net a 144 207 Unrealized mark-to-market gains (losses) on non-trading portfolios, net 1,102 (688) Development grants (2,830) (1,475) Net Loss $ (433) $ (1,114) Adjustments to reconcile net (loss) income to adjusted net income: Expenses relating to development financing activities directly funded by contributions from members 2,070 1,389 Contributions from affiliated organizations and others (544) (252) Non-functional currency translation adjustment losses (gains), net 372 (95) Unrealized mark-to-market (gains) losses on non-trading portfolios, net b (1,118) 731 Pension, PEBP and PCRF adjustments 42 71 EFO revenue 5 (6) Adjusted Net Income $ 394 724 a. Includes IDA’s share of returns from Post-Employment Benefit Plan (PEBP) and Post-Retirement Contribution Reserve Fund (PCRF) assets – $184 million of returns (FY20 - $20 million of returns). b. Excludes $16 million of losses from revenue-related forward currency contracts (FY20 - $43 million of gains). 14 IDA Management’s Discussion and Analysis: June 30, 2021 Management’s Discussion and Analysis Section IV: Financial Results Table 5: Condensed Balance Sheet In millions of U.S. dollars As of June 30, 2021 2020 Decrease Increase Assets Due from banks $ 496 $ 674 (178) Investments 37,376 34,670 2,706 Net loans outstanding a 177,779 160,961 16,818 Derivative assets, net 249 136 113 Other assets 3,424 3,031 393 Total assets $ 219,324 $ 199,472 19,852 Liabilities Borrowings $ 28,314 $ 19,766 8,548 Derivative liabilities, net 408 590 (182) Other liabilities 9,726 10,945 (1,219) Equity 180,876 168,171 12,705 Total liabilities and equity $ 219,324 $ 199,472 19,852 a. The fair value of IDA loans was $164,606 million as of June 30, 2021 ($149,597 million – June 30, 2020). Equity See Table 6 below for the change in IDA’s equity during FY21: Table 6: Changes in Equity In millions of U.S. dollars Equity as of June 30, 2020 $ 168,171 Activity during the year: Subscriptions and contributions paid-in 9,109 Nonnegotiable, noninterest-bearing demand obligations (753) Change in Accumulated deficit (1,235) Change in Accumulated other comprehensive income (loss) 5,583 Change in Deferred amounts to maintain value of currency holdings 1 Total activity 12,705 Equity as of June 30, 2021 $ 180,876 Total Assets As of June 30, 2021, total assets were $219.3 billion, an increase of $19.8 billion from June 30, 2020 ($199.5 billion). The increase was primarily driven by the increase in net loans outstanding and net investment portfolio, as discussed below. Results from Lending Activities Loan Portfolio and Grant Activity As of June 30, 2021, IDA’s net loans outstanding (after accumulated provision for losses on loans) was $177.8 billion, higher by $16.8 billion compared with June 30, 2020. The increase was mainly due to $10.2 billion in net loan disbursements and currency translation gains of $5.9 billion, consistent with the 3.7% appreciation of the SDR against the U.S. dollar during the year. As of June 30, 2021, 90% of IDA’s total loans outstanding were denominated in SDR. For the regional presentation of total loans outstanding, see Notes to the Financial Statements for the year ended June 30, 2021, Note D – Loans and Other Exposures – Table D8. IDA Management’s Discussion and Analysis: June 30, 2021 15 Management’s Discussion and Analysis Section IV: Financial Results Table 7: Net Loans Outstanding Activity Figure 2: Net Loans Outstanding In millions of U.S. dollars In billions of U.S. dollars 200 178 Net Loans outstanding as of June 30, 2020 $ 160,961 161 Activity during the period: 152 150 Gross loan disbursements 16,681 Loan repayments (6,457) 100 Change in Accumulated provision for loan losses a 702 Translation adjustments 5,909 Other b (17) 50 Total activity 16,818 Net Loans outstanding as of June 30, 2021 $ 177,779 0 Jun 19 Jun 20 Jun 21 a. Includes a decrease of $59 million in the accumulated provision for loan losses as of July 1, 2020 due to the adoption of ASU 2016-13. See Notes to the Financial Statements, Note D – Loans and other exposures. b. Includes deferred loan origination costs of $8 million, and HIPC debt relief provided of $9 million. IDA’s loans generally disburse within five to ten years for investment project financing and one to three years for development policy financing. Therefore, each year’s disbursements also include amounts relating to commitments made in earlier years (See Table 8). Table 8: Gross Disbursements of Loans and Grants by Region In millions of U.S. dollars 2021 2020 For the fiscal year ended June 30, Loans Grants a Total Loans Grants a Total Variance Eastern and Southern Africa $ 4,785 $ 3,296 $ 8,081 $ 5,524 $ 2,380 $ 7,904 $ 177 Western and Central Africa 4,384 1,661 6,045 4,160 1,309 5,469 576 East Asia and Pacific 1,186 111 1,297 1,470 119 1,589 (292) Europe and Central Asia 736 144 880 282 83 365 515 Latin America and the Caribbean 369 126 495 333 133 466 29 Middle East and North Africa 70 309 379 88 63 151 228 South Asia 5,145 599 5,744 4,587 648 5,235 509 Others b 6 - 6 5 - 5 1 Total $ 16,681 $ 6,246 $ 22,927 $ 16,449 $ 4,735 $ 21,184 $ 1,743 a. Excludes Project Preparation Advances (PPA). b. Represents loans under the PSW. As of June 30, 2021, 60% of IDA’s loans were on regular terms (75 basis points SDR equivalent service charge) see Table 9. During FY21, the interest revenue from loans included $1,535 million of service charges. The increase in IDA’s revenue from loans was primarily due to $244 million of service charges recognized when Sudan paid all its overdue principal and charges due to IDA, and the higher volume of loans outstanding. For more details, see Section IX: Risk Management. 16 IDA Management’s Discussion and Analysis: June 30, 2021 Management’s Discussion and Analysis Section IV: Financial Results Table 9: Revenue and Balances by Product Category In millions of U.S. dollars Interest revenue on loans a Balance as of June 30, For the fiscal year ended June 30, Category 2021 2020 2021 2020 Loans Concessional Regular $ 109,612 $ 101,957 $ 1,055 $ 828 Blend 65,203 58,652 862 739 Hard b 1,406 1,368 49 47 Non-concessional c 5,273 3,398 85 71 Others d 10 5 1 * Total $ 181,504 $ 165,380 $ 2,052 $ 1,685 a. Excludes interest rate swap expenses related to loan hedges - $2 million ($1 million in FY20). b. Prior to July 1, 2017, IDA offered Hard-Term loans to Blend Countries (excluding Small Island Economies). Hard-term loans are no longer offered. c. In addition, $19 million of commitment charges were earned in FY21 on undisbursed balances of non-concessional loans ($15 million in FY20). d. Represents loans under the PSW. * indicates amount less than $0.5 million. Results from Investing Activities Investment Portfolio IDA’s net investment portfolio increased to $ 37.9 billion as of June 30, 2021, from $35.6 billion as of June 30, 2020. The increase was primarily due to cash received from member contributions and proceeds from net new debt issuances, offset by net loan and grant disbursements. Net Investment Revenue During FY21, IDA’s net interest revenue from investments was $147 million, a decrease of $275 million compared with FY20. The decrease in interest revenue was mainly driven by the lower interest rate environment in the current year and the impact of negative interest rates in certain SDR component currencies as the investment portfolio is managed in these currencies. Figure 3: Net Investment Portfolio Figure 4: Net Investment Revenue In billions of U.S. dollars In millions of U.S. dollars 37.9 40 35.6 500 32.4 400 30 300 20 200 10 100 0 0 Jun 19 Jun 20 Jun 21 FY17 FY18 FY19 FY20 FY21 Results from Borrowing Activities (excluding associated derivatives) Market borrowings outstanding were $20.6 billion as of June 30, 2021, an increase of $8.5 billion compared to June 30, 2020 ($12.1 billion). The increase was driven mainly by net new issuances of medium and long- term debt instruments during the year. See Notes to the Financial Statements for the year ended June 30, 2021, Note E – Borrowings. Concessional partner loans are carried at amortized cost. As of June 30, 2021, total borrowings outstanding from members were $7.7 billion ($7.6 billion - June 30, 2020). As part of IDA19, two members have agreed to provide IDA with concessional partner loans totaling $1.1 billion. As of June 30, 2021, IDA had signed a concessional partner loan agreement with one of the members under IDA19 for $0.6 billion. Transfers from Affiliated Organizations Since 1964, IBRD has made transfers to IDA out of its net income, upon approval by the Board of Governors. Under a formula-based approach for IBRD's income support to IDA, the amount of income transfer recommended for IDA IDA Management’s Discussion and Analysis: June 30, 2021 17 Management’s Discussion and Analysis Section IV: Financial Results is a function of IBRD's financial results. On January 25, 2021, IBRD’s Board of Governors approved a transfer of $331 million to IDA which was received by IDA on February 1, 2021. On June 21, 2021, IFC’s Board of Governors approved a transfer of $213 million to IDA which was received by IDA on June 25, 2021. Net Non-Interest Expense As shown in Table 10, IDA’s net non-interest expenses are primarily comprised of administrative expenses, net of revenue from externally funded activities. IBRD and IDA's administrative budget is a single resource envelope that funds the combined work programs of IBRD and IDA. The allocation of administrative expenses between IBRD and IDA is based on an agreed cost and revenue sharing methodology, approved by their Boards, which is primarily driven by the relative level of activities relating to lending, knowledge services and other services between the two institutions. The administrative expenses shown in the table below include costs related to IDA-executed trust funds and other externally funded activities. See Table 10 for a comparison of the main sources of administrative expenses and revenue from externally funded activities in FY21 and FY20. IDA’s net non-interest expenses were $1,612 million in FY21, compared to $1,508 million in FY20. The key drivers during the year were: • increase in pension costs driven by a decrease in the discount rate resulting in higher service cost and higher amortization of unrecognized actuarial losses, offset by; • decrease in travel costs due to COVID-19, and; • decrease in the share of costs allocated to IDA. Table 10: Net Non-Interest Expenses In millions of U.S. dollars For the fiscal year ended June 30, 2021 2020 Variance Administrative expenses: Staff costs $ 1,121 $ 1,114 $ 7 Travel 15 135 (120) Consultant and contractual services 544 536 8 Pension and other post-retirement benefits 494 357 137 Communications and technology 68 63 5 Premises and equipment 135 151 (16) Other expenses 29 33 (4) Total administrative expenses $ 2,406 $ 2,389 $ 17 Contributions to special programs 20 21 (1) Revenue from externally funded activities: Reimbursable advisory services (46) (65) 19 Reimbursable revenue - IDA-executed trust funds (553) (586) 33 Revenue – trust funds administration (38) (41) 3 Restricted revenue (15) (28) 13 Other revenue (162) (182) 20 Total revenue from externally funded activities $ (814) $ (902) $ 88 Total Net Non-Interest Expenses (Table 4) $ 1,612 $ 1,508 $ 104 During FY21, IDA’s net other revenue increased by $66 million. The main driver was the PPA grant activity, including cancellations and refinancing of PPA grants previously approved. Table 11: Other Revenue (Expenses), net In millions of U.S. dollars For the fiscal year ended June 30, 2021 2020 Variance Other (primarily PPA grants) $ 20 $ (40) $ 60 Guarantee fees 17 15 2 Commitment charges 19 15 4 Other Revenue (Expenses), net (Table 4) $ 56 $ (10) $ 66 18 IDA Management’s Discussion and Analysis: June 30, 2021 Management’s Discussion and Analysis Section IV: Financial Results IDA’s goal is to have its net administrative expenses covered by its loan revenue (loan interest, service, commitment, and guarantee fees). Thus, IDA monitors its net administrative expenses as a percentage of its loan revenue, using a measure referred to as the budget anchor. In FY21, IDA’s budget anchor was 66.7%, lower by 14.3 percentage points compared to FY20 primarily due to higher interest revenue from loans. See Table 12. Table 12: Budget Anchor In millions of U.S. dollars For the fiscal year ended June 30, 2021 2020 Variance Total net Non-interest Expenses (Table 10) $ 1,612 $ 1,508 $ 104 Pension and EFO adjustments a (231) (85) (146) Net administrative expenses for Budget Anchor $ 1,381 $ 1,423 $ (42) Interest Revenue from Loans, net (Table 4) $ 2,050 $ 1,684 $ 366 Commitment fee and Guarantee fee revenue (Table 11) 36 30 6 (Losses) gains on revenue-hedging forward currency contracts (16) 43 (59) Total revenue for Budget Anchor $ 2,070 $ 1,757 $ 313 Budget Anchor 66.7% 81.0% -14.3% a. These adjustments are made to arrive at net administrative expenses used for adjusted net income purposes. Figure 5: Budget Anchor In millions of U.S. dollars, except ratio in percentages 2,000 97.6% 120.0% 81.0% 100.0% 1,500 66.7% 80.0% 1,000 60.0% 40.0% 500 20.0% 0 0.0% FY19 FY20 FY21 Net administrative expenses for budget anchor Budget Anchor Revenue Budget Anchor Provision for losses on loans and other exposures In FY21, IDA recorded a release of provision for losses on loans and other exposures of $539 million compared to $170 million of release in FY20 (see Notes to the Financial Statements for the year ended June 30, 2021, Note D – Loans and Other Exposures – Table D5). The movement is primarily attributed to: • the release of provision for HIPC debt relief of $819 million when Sudan paid all its overdue principal and charges due to IDA in March 2021; offset by, • an increase in exposure comprised of volume of loans as well as inclusion of signed commitments in the provisioning under the Current Expected Credit Losses (CECL) methodology which became effective July 1, 2020. (see section X: Critical Accounting Policies and the Use of Estimates). Table 13: Provision for losses on loans and other exposures In millions of U.S. dollars For the fiscal year ended June 30, 2021 2020 Variance Provision for losses on loans and other exposures, release (charge) Loans and other exposures $ (289) $ (36) $ (253) Debt relief under HIPC/MDRI 828 206 622 Total $ 539 $ 170 $ 369 IDA Management’s Discussion and Analysis: June 30, 2021 19 Management’s Discussion and Analysis Section IV: Financial Results Unrealized mark-to-market gains (losses) on non-trading portfolios, net During FY21, the non-trading portfolios had $1,102 million of net unrealized mark-to-market gains ($688 million net unrealized mark-to-market losses in FY20). The increase was mainly driven by unrealized mark-to-market gains from the derivatives held for the CVP portfolio due to the increase in U.S. dollar interest rates. Table 14: Unrealized Mark-to-Market gains (losses) on non-trading portfolios, net In millions of U.S. dollars For the fiscal year ended June 30, 2021 2020 Variance Asset-liability management $ 1,080 $ (699) $ 1,779 Investment portfolio (12) 29 (41) Other a 34 (18) 52 Total $ 1,102 $ (688) $ 1,790 a. Other comprises mark-to-market gains or losses on the borrowing and loan portfolios and on PSW. Non-functional currency translation adjustment gains (losses), net These represent unrealized exchange rate gains/losses resulting from the translation of loans, borrowings, and all other assets and liabilities held on IDA’s Balance Sheet, that are denominated in currencies other than the SDR and its component currencies. During FY21, translation adjustment losses on non-functional currencies were $372 million as most of the non-functional currencies appreciated against the U.S. dollar, IDA’s reporting currency. In comparison, in FY20, the translation adjustment gains were $95 million due to the depreciation of most of these non-functional currencies against the U.S. dollar. 20 IDA Management’s Discussion and Analysis: June 30, 2021 Management’s Discussion and Analysis Section V: Development Activities, Products and Programs Section V: Development Activities, Products and Programs Lending Framework IDA provides financing to lower-income countries primarily through loans, grants and guarantees. IDA has a common framework which extends across all its development activities. The main elements of this framework are financing principles, financing cycles and financing categories. Financing Principles IDA’s operations are required to conform to the ge neral principles derived from its Articles of Agreement. These principles are described in Box 2. Within the scope permitted by the Articles of Agreement, application of these financing principles must be developed and adjusted in light of experience and changing conditions. Financing Cycles The process of identifying and appraising a project and approving and disbursing the funds often extends over several years. However, in response to emergency situations, such as natural disasters and financial crises, IDA is able to accelerate the preparation and approval cycle. In most cases, IDA’s Board approves each loan, grant, and guarantee after appraisal of a project by staff. Under a Multiphase Programmatic Approach (MPA) approved by the Board in FY18, the Board may approve an overall program framework, its financing envelope and the first appraised phase, and then authorize management to appraise and commit financing for later program phases. Disbursements are subject to the fulfillment of conditions set out in the loan or grant agreement. IDA used this approach to expedite support for COVID-19 related projects. As of June 30, 2021, $6.6 billion was committed under the MPA, of which $4.4 billion was COVID-19 related commitments. During implementation of IDA-supported operations, staff review progress, monitor compliance with IDA ’s policies, and assist in resolving any problems that may arise. An independent unit, the Independent Evaluations Group, also assesses the extent to which operations have met their major objectives, and these evaluations are reported directly to the Board. Financing Categories Most of IDA’s lending is of three types: investment project financing, development policy financing, and program - for-results. Figure 6 shows the percentage of loans approved for investment lending, development policy operations and program-for-results over the past five years. Box 2: Financing Principles (i) IDA may provide financing for its development operations in the form of loans, grants, and guarantees directly to its members, public or private entities and regional or public international organizations. (ii) IDA’s financing of its development operations is designed to promote economic development, increase productivity, and thus raise standards of living in its member countries. Investment projects financed by IDA are required to meet IDA’s standards for technical, economic, financial, institutional, and environmental soundness. Specific provisions apply to development policy financing, including the treatment of the macroeconomic framework, poverty and social impact, environment, forests, and other natural resources. (iii) Decisions to approve financing are based upon, among other things, studies by IDA of a member country’s economic structure, including assessments of its resources and ability to generate sufficient foreign exchange to meet debt-service obligations. (iv) IDA must be satisfied that in the prevailing market conditions (taking into account the member’s overall external financing requirements); the recipient would be unable to obtain financing under conditions which, in the opinion of IDA, are reasonable for the recipient. This would include loans made by private sources or IBRD. (v) The use of funds by recipients is supervised. IDA makes arrangements intended to ensure that funds provided are used only for authorized purposes and, where relevant, with due attention to considerations of cost-effectiveness. This policy is enforced primarily by requiring recipients (a) to submit documentation establishing, to IDA’s satisfaction, that the expenditures fina nced with the proceeds of loans or grants are made in conformity with the applicable financing agreements, and (b) to maximize competition in the procurement of goods and services by using, wherever possible, international competitive bidding procedures or, when it is not appropriate, other procedures that ensure maximum economy and efficiency. In addition, IDA considers the use of recipient country procurement, financial management and environmental and social safeguard systems in selected operations once these systems and capacity have been assessed by IDA as acceptable. IDA Management’s Discussion and Analysis: June 30, 2021 21 Management’s Discussion and Analysis Section V: Development Activities, Products and Programs Figure 6: Net Annual Commitments and share of financing categories In billions of U.S. dollars, except rates in percentages Percent $19 $24 $22 $30 $36 100 4 12 7 12 10 29 24 22 19 75 9 50 78 72 71 69 62 25 0 FY17 FY18 FY19 FY20 FY21 Investment Lending Development Policy Program-for-Results Investment Project Financing (IPF) IPF is used in all sectors and supports a wide range of activities including capital-intensive investments, agricultural development, service delivery, credit and grant delivery, community-based development, and institution building. IPF is usually disbursed over the long-term (5 to 10-year horizon). FY21 net commitments under IPF totaled $24.7 billion, compared with $21.8 billion in FY20. Development Policy Financing (DPF) DPF provides rapidly disbursing financing (1 to 3 years) to help a borrower address actual or anticipated financing requirements. DPF aims to support the borrower in achieving sustainable development through a program of policy and institutional actions, for example, strengthening public financial management, improving the investment climate, addressing bottlenecks to improve service delivery, and diversifying the economy. DPF supports such reforms through non-earmarked general budget financing that is subject to the borrower's own implementation processes and systems. FY21 net commitments under DPF totaled $7.0 billion, compared with $7.3 billion in FY20. Program-for-Results (PforR) PforR helps countries improve the design and implementation of their development programs and achieve specific results by strengthening institutions and building capacity. It helps strengthen partnerships with governments, development partners and other stakeholders by providing a platform to collaborate in larger country programs. PforR disburses when agreed results are achieved and verified. Results are identified and agreed upon during the preparation stage. FY21 net commitments under PforR totaled $4.3 billion, compared with $1.3 billion in FY20. These three complementary categories support the policy and institutional changes needed to create an environment conducive to sustained and equitable growth. Financial Terms Commitment Currency The currency of commitment for IDA grants and concessional loans is predominantly the SDR. However, in response to client needs to reduce currency exposure and simplify debt management, IDA offers a Single Currency Lending option that allows IDA recipients to denominate new IDA loans in U.S. dollar, euro, pound sterling or Japanese yen. Further, non-concessional loans provided under IDA19 may only be denominated in either U.S. dollar, euro, pound sterling or Japanese yen. For cumulative loans approved under Single Currency program as of June 30, 2021, see Table 15. 22 IDA Management’s Discussion and Analysis: June 30, 2021 Management’s Discussion and Analysis Section V: Development Activities, Products and Programs Table 15: Cumulative Loans approved under Single Currency program In billions of U.S. dollar equivalent value As of June 30, 2021 Euro $ 21.9 U.S. dollar 19.0 Japanese Yen 0.5 Total $ 41.4 Of the above, loans outstanding at the end of the year $ 15.3 Table 16: Summary of Financial Terms for IDA Lending Products, effective July 1, 2021 Maturity/Grace Instrument type a Currencies Current Charges Interest rates Period Grant SDR Not applicable None Not applicable SDR, USD, EUR, 75bps SDR equivalent Regular-Term loan 38/6 years Not applicable GBP, JPY service charge Regular-Small Economy SDR, USD, EUR, 75bps SDR equivalent 40/10 years Not applicable loan GBP, JPY service charge SDR, USD, EUR, 75bps SDR equivalent 1.25% SDR equivalent Blend-Term loan 30/5 years GBP, JPY service charge interest rate Up to 35 years 25 bps one-time front- Non-concessional loans - USD, EUR, GBP, maximum; up to 20 IBRD Flexible Loan end fee Scale-up Window (SUW) JPY years average terms b 25 bps commitment fee maturity Before Drawdown: Front end fee and renewal fee are set at 0.5% and 0.25% respectively under SUW option, and at 0% under PBA or Undisbursed balances option. Catastrophe Deferred Draw SDR, USD, EUR, Down Option (CAT DDO) c GBP, JPY After Drawdown: - Under PBA or Undisbursed balances option - IDA concessional rates would apply. - Under SUW option - non-concessional rates would apply. a. Prior to July 1, 2017, IDA offered Hard-Term loans to Blend Countries (excluding Small Island Economies). They had a single currency option, and had terms equivalent to IBRD’s fixed spread loans, less 200 bps, a variable option was also available. Hard-term loans are no longer offered. b. There is an implicit floor of zero on the overall interest rate in IDA’s non-concessional loans. Effective April 1, 2021, loans with fixed spread terms were suspended. See the implications of alternative reference rate changes in Section IX: Risk Management. c. The volume of committed and undisbursed CAT DDOs financed by IDA is limited to 0.5 percent of the country’s GDP or USD 250 million, whichever is lower. The CAT DDO may be renewed once, for a maximum of six years in total. Charges on Loans and Grants Service charges and interest income earned on IDA’s loans are reported as Interest revenue on loans in the Statement of Income. Commitment charges earned on loans and grants (if any) are reported as non-interest revenue in the Statement of Income. Service Charge: A service charge is levied on the principal amount disbursed and outstanding on all Regular, Small Economy, and Blend term loans, regardless of repayment terms, at 0.75% per annum. Interest: Interest is charged on all loans subject to blend terms approved from IDA16, hard-term loans, and non- concessional loans. Further, loans offered under non-concessional terms are available at variable interest rates on IBRD terms. All other rates are fixed. Commitment Charge: A commitment charge, which is payable on any undisbursed loan or grant amount, is set by the Board at the beginning of each fiscal year. Commitment charges are set at a level to ensure that net loan revenue covers administrative expenses over the medium term. From FY09 to FY21, the commitment charge on undisbursed concessional loans had been set at nil, and for grants it had been set at nil from FY03 to FY21. For FY22, commitment charges remain set at nil, the same level as FY21. The commitment charge on non-concessional loans is aligned to IBRD terms, which include a commitment charge of 0.25%. IDA Management’s Discussion and Analysis: June 30, 2021 23 Management’s Discussion and Analysis Section V: Development Activities, Products and Programs Repayment Terms Loans approved through June 30, 1987 have a final maturity of 50 years, including a grace period of 10 years. In recent replenishments, differentiation in IDA’s lending terms has been introduced to recognize the variation in economic development of broad categories of IDA recipients. Since 1987, the legal agreements of regular, blend and hard-term loans include an accelerated repayment clause to double the principal repayments of the loan if the borrower’s GNI per capita exceeds a specific threshold and the borrower is eligible for IBRD financing. Implementation is subject to negotiation with the borrower and approval by IDA’s Board after considering a borrower’s economic development. The borrower can further negotiate either to (a) shorten the loan’s maturity (principal option), (b) pay interest at a rate that would result in the same net present value (interest option), or a combination of the two options. As of June 30, 2021, the acceleration clause was implemented for the qualifying loans of 18 borrowers that have graduated from IDA since the introduction of the accelerated repayment clause. Of these 18 borrowers, 11 borrowers selected the principal option, 6 borrowers selected the interest option, and one borrower selected a combination of the two options. The accelerated repayment clauses in all of these legal agreements also allow a borrower to subsequently request pausing of those accelerated terms if economic conditions in the borrower’s count ry have deteriorated, in which case, the terms of repayment can revert to the original terms of the financing agreements. Given the challenging economic situation as a result of the COVID-19 outbreak, for ten graduate countries whose accelerated repayments were approved by the Board for implementation in IDA17 and IDA19, management approved a one-year pause of the accelerated payment terms to conform to the schedule originally provided in their financing agreements which became effective July 1, 2020. Subsequently, this was extended for an additional year for five graduate countries. As of June 30, 2021, $1.7 billion of loans outstanding were under the original accelerated repayment terms. As these repayment accelerations and decelerations are contemplated in the original terms of the instruments, they do not constitute loan modifications. Loans, Grants and Guarantee Activity Commitments FY21 net loan commitments were $23.9 billion, an increase of $1.6 billion (7%) over FY20 ($22.3 billion). There were no guarantee commitments in FY21, a decrease of $25 million over FY20. (See Table 17). Also, see Section VI: Other Development Activities and Programs. FY21 Net commitments of grants were $12.1 billion, an increase of $4.1 billion (52%) over FY20 ($8.0 billion). (See Table 18). Table 17: Net Commitments of Loans and Guarantees by Region In millions of U.S. dollars For the fiscal year ended June 30, 2021 % of total 2020 % of total Variance Eastern and Southern Africa $ 7,105 30 $ 5,751 26 $ 1,354 Western and Central Africa 7,900 33 7,187 32 $ 713 East Asia and Pacific 1,003 4 2,248 10 (1,245) Europe and Central Asia 966 4 1,084 5 (118) Latin America and the Caribbean 622 3 748 3 (126) Middle East and North Africa 20 * 146 1 (126) South Asia 6,291 26 5,210 23 1,081 Total $ 23,907 100 $ 22,374 100 $ 1,533 of which Guarantees $ - $ 25 $ (25) * indicates percentage less than 0.5%. 24 IDA Management’s Discussion and Analysis: June 30, 2021 Management’s Discussion and Analysis Section V: Development Activities, Products and Programs Table 18: Net Commitments of Grants by Region In millions of U.S. dollars For the fiscal year ended June 30, 2021 % of total 2020 % of total Variance Eastern and Southern Africa $ 6,984 58 $ 3,830 48 $ 3,154 Western and Central Africa 3,055 25 2,327 29 728 East Asia and Pacific 112 1 252 3 (140) Europe and Central Asia 349 3 413 5 (64) Latin America and the Caribbean 147 1 230 3 (83) Middle East and North Africa 638 5 57 1 581 South Asia 836 7 882 11 (46) Total $ 12,121 100 $ 7,991 100 $ 4,130 IDA Management’s Discussion and Analysis: June 30, 2021 25 Management’s Discussion and Analysis Section VI: Other Development Activities and Programs Section VI: Other Development Activities and Programs IDA has products, services, and programs, other than lending, that it offers to its borrowing member countries to help them meet their development goals. These include guarantees, debt relief, trust fund administration, and externally funded reimbursable advisory services. Guarantees IDA offers both project-based and policy-based guarantees. These guarantees are available for projects and programs in member countries to help mobilize private financing for development purposes. IDA’s guarantees are partial in nature as they are intended to cover risks only to the extent necessary to obtain the required private financing, taking into account country, market and, if appropriate, project circumstances. IDA’s guarantees require a sovereign counter- guarantee and indemnity, comparable to the requirement of a sovereign guarantee for IDA lending to sub-sovereign and non-sovereign borrowers. See Table 19 for the types of guarantees that IDA provides. These guarantees are separate and distinct from those offered under the Private Sector Window. The Corporate Risk Guarantee Committee informs the use of the guarantee instrument. Table 19: Types of Guarantees Project-based Project-based guarantees are provided to mobilize private financing for a project and/or mitigate payment guarantees and/or performance related risks of a project. There are two types: 1. Loan guarantees: these cover loan-related debt service defaults caused by the government’s failure to meet specific payment and/or performance obligations arising from contract, law, or regulation. Loan guarantees include coverage for debt service defaults on: (i) commercial debt, normally for a private sector project; and, (ii) a specific portion of commercial debt irrespective of the cause of such default, normally for a public-sector project. 2. Payment guarantees: These cover payment default on non-loan related government payment obligations to private entities and foreign public entities arising from contract, law, or regulation. Policy-based Policy-based guarantees are provided to mobilize private financing for sovereigns or sub-sovereigns. They guarantees cover debt service default, irrespective of the cause of such default, on a specific portion of commercial debt owed by government and associated with the supported government’s program of policy and institutional actions. Table 20: Pricing for IDA’s Project-Based and Policy-Based Guarantees, effective July 1, 2021 Guarantees on Concessional Terms Guarantees on Non-Concessional Terms Charges Private Projects Public Projects Private Projects Public Projects Front-end fee N.A. N.A. 25 bps 25 bps Initiation fee a 15 bps N.A. 15 bps N.A. Processing fee b Up to 50 bps N.A. Up to 50 bps N.A. Standby fee 0 bps 0 bps 25 bps 25 bps Guarantee fee 75 bps 75 bps 50-100 bps c 50-100 bps c a. The Initiation fee is 15 basis points of the guaranteed amount or $100,000, whichever is greater. b. The processing fee is determined on a case-by-case basis. c. Based on the weighted average maturity of the guarantee. Guarantee Exposure IDA’s guarantee exposure (measured by discounting each guaranteed amount from its next call date), was $1,998 million as of June 30, 2021 ($2,019 million—June 30, 2020). The maximum potential undiscounted future payments that IDA could be required to make under these guarantees is $2,029 million as of June 30, 2021 ($2,054 million— June 30, 2020). In addition, IDA had $484 million of exposure under PSW guarantees as of June 30, 2021. See Section III: IDA’s Financial Resources. For additional information, see Notes to the Financial Statements for the year ended June 30, 2021, Notes D – Loans and Other Exposures and Note G – Transactions with Affiliated Organizations. Other Financial Products and Services IDA facilitates access to risk management solutions to mitigate the financial effects of natural disasters for borrowing members. Financial solutions can include disaster risk financing through catastrophe swaps, insurance and reinsurance contracts, and regional pooling facilities. In order to promote countries’ resilience to disasters and expand the range of IDA’s crisis instruments, in IDA18, members endorsed the introduction of the Catastrophe Deferred Draw-Down Option (CAT-DDO). The CAT-DDO is 26 IDA Management’s Discussion and Analysis: June 30, 2021 Management’s Discussion and Analysis Section VI: Other Development Activities and Programs a contingent credit line that provides immediate liquidity to countries in the aftermath of a catastrophe and serves as early financing while funds from other sources such as bilateral aid or reconstruction loans are being mobilized. CAT- DDOs are intended to enhance IDA countries’ capacity to plan for and manage crises. As of June 30, 2021, the amount of CAT DDOs disbursed and outstanding was $388 million (compared to $330 million as of June 30, 2020), and the undisbursed amount of effective CAT DDOs was $56 million, compared to $90 million a year earlier. Grant Making Facilities Grant-Making Facilities (GMFs) are complementary to IDA’s work. In FY21, IDA recorded $20 million under this program in accordance with the cost sharing agreement with IBRD (FY20 - $21 million). These amounts are reflected in contributions to special programs in IDA’s Statement of Income. Debt Relief The Heavily Indebted Poor Countries Debt Initiative (HIPC Initiative) and the Multilateral Debt Relief Initiative (MDRI) were implemented in 1996 and 2006 respectively as a part of a global effort focused on heavily indebted poor countries with strong policy performance. The initiatives aim to reduce the external debt of eligible countries as part of a broader poverty reduction strategy, whilst safeguarding the long-term financial capacity of IDA and other participating multilateral institutions; and encouraging the best use of additional member resources for development, by allocating these resources to low-income countries on the basis of policy performance. In order to receive irrevocable debt relief, eligible countries are required to maintain macroeconomic stability, carry out key structural and social reforms, and implement a Poverty Reduction Strategy, in addition to being in good standing with respect to all eligible debt repayments. To ensure IDA’s financial capacity was not eroded, members agreed to compensate IDA with additional contributions to offset the impact of the forgone reflows, resulting from the provision of debt relief. The accumulated provision for debt relief was recorded at the inception of the initiative and is based on both quantitative and qualitative analyses of various factors, including estimates of the Decision and the Completion Point dates. These factors are periodically reviewed, and the adequacy of the accumulated provision is reassessed and adjusted to reflect the impact of any changes. During FY21, HIPC debt relief was provided on $9 million of loans ($10 million in FY20). There was no HIPC debt relief on service charges in FY21 or FY20. On a cumulative basis, debt relief has been provided on $2.1 billion of loans and $335 million of service charges under HIPC as of June 30, 2021. On June 29, 2021, Sudan reached Decision Point under the HIPC debt relief initiative and became eligible for $114 million in debt relief. As a result, IDA recorded a $114 million provision for losses under HIPC on Sudan’s outstanding loans as of June 30, 2021. During FY21 and FY20, there was no cancellation of eligible loans under MDRI. On a cumulative basis, debt relief has been provided on $40.2 billion of loans under the MDRI as of June 30, 2021. The provision for the debt relief was recorded at the beginning of the MDRI Initiative. Externally-Funded Activities Mobilization of external funds from third-party partners includes Trust Funds. Additional external funds include reimbursable funds and revenues from fee-based services to member countries, which are related to Reimbursable Advisory Services (RAS), and EFO. Trust Funds Trust Funds are a part of the WBG’s development activities, providing resources and added flexibility in providing development solutions that serve member recipients and donors alike. The partnerships funded by trust funds often serve as a platform from which IDA and its members can draw on the WBG’s diverse technical and financial resources to achieve development goals that cannot be addressed effectively by any single member, given their complexity, scale, and scope. Management is implementing measures to better integrate planning, support sustainability and enhance alignment of External Funds with mission priorities through greater use of umbrella trust fund programs, increased cost recovery, and new budgetary planning measures to manage External Funds usage. IDA’s roles and responsibilities in managing trust funds depend on the type of fund, outlined as follows: IDA Management’s Discussion and Analysis: June 30, 2021 27 Management’s Discussion and Analysis Section VI: Other Development Activities and Programs IDA-Executed Trust Funds (BETFs): IDA, alone or jointly with one or more of its affiliated organizations, manages the funds and implements the activities financed. These trust funds support IDA’s work program. IDA, as an executing agency, disbursed $553 million in FY21 ($586 million in FY20) of trust fund program funds. Recipient-Executed Trust Funds (RETFs): Funds are provided to a third party, normally in the form of project grant financing, and are supervised by IDA. Financial Intermediary Funds (FIFs): IDA, as a trustee, administrator, or treasury manager, offers specific administrative or financial services with a limited operational role. Arrangements include the administration of debt service trust funds, fiscal agency funds and other more specialized limited fund management roles. IDA earned revenue from Trust Fund administration activity of $38 million in FY21 ($41 million in FY20). For additional information, see Notes to the Financial Statements for the year ended June 30, 2021, Note H-Trust Funds Administration. As noted in the discussion of Trust Fund activities above, IDA, alone or jointly with one or more of its affiliated organizations, administers on donors’ behalf funds restricted for specific uses. Such administration is governed by agreements with donors, who include members, their agencies, and other entities. These funds are held in trust and are not included on IDA’s Balance Sheet, except for $ 749 million of undisbursed third-party contributions made to IDA-executed trust funds, which are recognized on the Balance Sheet. These amounts are included in Other assets and the corresponding liabilities are included in Accounts payable and miscellaneous liabilities on the Balance Sheet. The cash and investment assets held in trust by IDA as administrator and trustee as of June 30, 2021 and June 30, 2020 are summarized in Table 21. Table 21: Cash and Investment Assets Held in Trust by IDA In millions of U.S. dollars Total Fiduciary Assets As of June 30, 2021 2020 IDA-executed $ 44 $ 49 Jointly executed with affiliated organization 1,025 944 Recipient-executed 2,365 1,964 Financial intermediary funds 286 281 Execution not yet assigned a 5,365 4,643 Total $ 9,085 $ 7,881 a. These represent assets held in trust for which the determination as to the type of execution is yet to be finalized. Reimbursable Advisory Services (RAS) While most of IDA’s advisory and analytical work is financed by its own budget or donor contributions (e.g., Trust Funds), clients may also pay for services. IDA offers technical assistance and other advisory services to its member countries, in connection with, and independent of, lending operations. Available services include, for example, assigning qualified professionals to survey developmental opportunities in member countries; analyzing member countries fiscal, economic, and developmental environments; helping members devise coordinated development programs; and improving their asset and liability management techniques. In FY21, income relating to reimbursable advisory services was $46 million (FY20 - $65 million). Externally Financed Outputs (EFOs) IDA offers donors the ability to contribute to specific projects and programs. EFO contributions are recorded as restricted revenue when received because they are for contractually specified purposes. Restrictions are released once the funds are used for the purposes specified by donors. In FY21, IDA had $21 million of revenue, compared with $23 million in FY20. 28 IDA Management’s Discussion and Analysis: June 30, 2021 Management’s Discussion and Analysis Section VII: Investment Activities Section VII: Investment Activities As of June 30, 2021, IDA’s net investment portfolio totaled $37.9 billion (Figure 7). See the Notes to the Financial Statements for the year ended June 30, 2021, Note C – Investments. Figure 7: Net Investment Portfolio In billions of U.S. dollars Trading Portfolio Non-trading Portfolio 40 0.5 0.6 0.7 30 20 37.4 31.7 35.0 10 0 Jun 19 Jun 20 Jun 21 Liquid Asset Portfolio The primary objective of IDA’s liquid asset portfolio strategy continues to be preservation of capital within institutional constraints. Consistent with this primary objective, IDA invests in high quality instruments. IDA aims to earn reasonable investment returns, while ensuring timely availability of funds for future cash flow requirements, including disbursements for loans, grants, debt service, and administrative expenses. For IDA19, as part of IDA’s evolving ALM needs, to ensure that the overall liquidity level is maintained prudently and to address the new business circumstances of COVID-19 crisis response, the following refinements to the investment strategy were implemented from July 1, 2020. As a result, the average duration of the liquid asset portfolio shortened to four months in FY21 compared to fifteen months in FY20. • Aligned the stable sub-portfolio investment benchmark with the funding benchmark, as the stable sub-portfolio is expected to be increasingly funded by debt during IDA19 and beyond. • Merged Tranche 1 assets into stable or discretionary sub-portfolio, as applicable. Table 22: Liquid Asset Portfolio Composition In millions of U.S. dollars As of June 30, 2021 2020 Liquid Asset Portfolio Operational $ 12,836 $ 9,276 Stable 24,598 15,624 Discretionary - 87 Tranche 1 - 9,959 Total $ 37,434 $ 34,946 As of June 30, 2021, $28.0 billion (approximately 74% of total volume) was due to mature within six months, of which $11.6 billion was expected to mature within one month. IDA’s return on its liquid asset portfolio for FY21 (excluding unrealized mark-to-market gains / losses on PEBP assets) was 0.25%, compared to 1.73% in FY20, primarily due to unrealized mark-to-market losses on investments – trading in FY21 compared to unrealized mark-to-market gains in FY20, reflecting the increase in yield curves during the year. Table 23 provides a breakdown of the average balances and returns of IDA’s liquid asset portfolio. For details on returns of the total portfolio, refer to Section IV: Financial Results. IDA Management’s Discussion and Analysis: June 30, 2021 29 Management’s Discussion and Analysis Section VII: Investment Activities Table 23: Average Balances and Returns by Sub-Portfolio In millions of U.S. dollars, except rates in percentages FY21 FY20 Sub Portfolios Average Balance Return Average Balance Return Operational $ 9,557 0.23% $ 8,600 0.46% Stable 25,708 0.23% 15,420 1.87% Discretionary * 87 0.26% 129 1.72% Tranche 1 - 0.00% 9,814 2.74% Total $ 35,309 0.25% $ 33,963 1.73% * Discretionary sub-portfolio was terminated in December 2020. IDA’s liquid assets are held mainly in the following types of highly rated, fixed -income instruments. See Table 29 for eligibility criteria for IDA’s investments. • Government and Agency Obligations. • Time deposits, and other unconditional obligations of banks and financial institutions. • Asset-backed securities (including mortgage-backed securities). • Currency and interest rate derivatives (including currency forward contracts). • Exchange-traded options and futures. IDA’s prudential minimum liquidity policy ensures that it holds sufficient liquidity. The prudential minimum liquidity level is set at 80% of 24 months of projected net outflows. For FY21, the prudential minimum was $21.2 billion. The prudential minimum for FY22 has been set at $19.3 billion. See Section IX: Risk Management for details on how IDA manages liquidity risk. Investments - Non-Trading Portfolio During FY15, with the proceeds of a concessional loan from a member, IDA purchased a debt security issued by the IFC. IDA elected to measure the security at fair value, so that the measurement method could be consistently applied to all its investments. The changes in fair value for this security are reflected in the Statement of Income. As of June 30, 2021, the investment non-trading portfolio had a fair value of $487 million ($625 million in FY20). See Notes to the Financial Statements for the year ended June 30, 2021, Note C – Investments. 30 IDA Management’s Discussion and Analysis: June 30, 2021 Management’s Discussion and Analysis Section VIII: Borrowing Activities Section VIII: Borrowing Activities Concessional Partner Loans Concessional partner loans (CPLs) continue as a source of funding, whereby the borrowing terms of the concessional loans from members aim to follow the concessional features of IDA’s loans. The maturities of the CPLs are either 25 or 40 years to match the terms of IDA’s loans, with a grace period of 5 years for a 25-year loan and 10 years for a 40-year loan. The loans have an all in SDR equivalent coupon of up to one percent. Voting rights are allocated to members who provide concessional loans following the drawdowns by IDA, and are based on the cash paid, computed as the derived grant element of the loan. The grant element, which is paid in cash and recorded as equity, is a function of the terms of the loan and the discount rate agreed upon during the replenishment discussions – 2.25% SDR equivalent for 25-year maturity and 2.57% for 40-year maturity in IDA19 (IDA18 - 2.35% SDR equivalent for 25-year maturity and 2.70% for 40-year maturity). The increase of $0.1 billion in concessional partner loans outstanding was primarily due to translation adjustment losses. Interest expense associated with these loans was $149 million in FY21 (FY20 - $138 million). See Table 24. Market Debt IDA has been issuing bonds in the international capital markets since 2018. The market borrowings increased by $8.4 billion compared to June 30, 2020 primarily due to net issuance of medium and long-term debt instruments during the year. See Table 24. Table 24: Borrowings In millions of U.S. dollars, except rates in percentages Outstanding as of June 30, Interest expense a Weighted average rate 2021 2020 FY21 FY20 FY21 FY20 Market debt $ 20,555 12,131 95 101 0.65% 0.66% Concessional partner loans $ 7,759 7,635 149 138 1.90% 1.88% Total $ 28,314 $ 19,766 $ 244 $ 239 0.99% 1.14% a. Excludes gains related to borrowings swaps net of repurchase agreement expenses - $57 million in FY21 ($2 million of net expenses in FY20). IDA uses currency and interest rate derivatives in connection with its borrowings for asset and liability management purposes. For more details, see Section IX: Risk Management. Figure 8: Effect of Derivatives on Currency Composition of the Borrowing Portfolio–June 30, 2021 Borrowings including Derivatives Borrowings excluding Derivatives Others 2% GBP JPY 9% JPY 14% 14% GBP USD USD 17% 49% EUR 59% 18% EUR 18% IDA Management’s Discussion and Analysis: June 30, 2021 31 Management’s Discussion and Analysis Section VIII: Borrowing Activities Figure 9: Medium- and Long-Term Borrowings Issued by Currency during the year, Excluding Derivatives June 30, 2021 June 30, 2020 Others EUR 8% 22% EUR USD 25% 18% GBP 14% JPY USD GBP 64% 14% 35% Other Short-Term Borrowings Under its Investment Guidelines, IDA is allowed to enter into transactions involving securities sold under repurchase agreements and securities lent under securities lending agreements. These transactions are accounted for as short-term borrowings. The agreements are secured predominantly by high quality collateral, including government issued debt, and are used both to enhance returns and for liquidity management purposes. As of June 30, 2021, there were no securities sold under repurchase agreements or any securities lent under securities lending agreements ($107 million – June 30, 2020). Table 25 provides details on these short-term borrowing activities. Table 25: Other Short-Term Borrowings In millions of U.S. dollars, except rates in percentages As of June 30, 2021 2020 2019 Securities sold under repurchase agreements and securities lent under securities lending agreements, Balance at year-end $ - $ 107 $ 698 Average monthly balance during the year $ 9 $ 430 $ 1,417 Maximum month-end balance $ 107 $ 619 $ 2,465 Weighted-average rate at end of fiscal year - 0.16% 2.71% Weighted-average rate during the fiscal year 0.16% 1.49% 2.20% Contractual Obligations In conducting its business, IDA takes on contractual obligations that may require future payments mainly associated with IDA’s borrowings. See Notes to the Financial Statements for the year ended June 30, 2021, Note E – Borrowings – Table E5. These contractual obligations exclude the following obligations reflected on IDA’s balance sheet: undisbursed loans, amounts payable for currency and interest rate swaps, amounts payable for investment securities purchased, guarantees, and cash received under agency arrangements. 32 IDA Management’s Discussion and Analysis: June 30, 2021 Management’s Discussion and Analysis Section IX: Risk Management Section IX: Risk Management Risk Governance IDA’s risk management processes and practices continually evolve to reflect changes in activities in response to market, credit, product, operational, and other developments. The Board, particularly Audit Committee members, periodically review trends in IDA’s risk profiles and performance, and any major developments in risk management policies and controls. Management believes that effective risk management is critical for IDA’s overall operations. Accordingly, the risk management governance structure is designed to manage the principal risks IDA assumes in its activities, and supports management in its oversight function, particularly in coordinating different aspects of risk management and in connection with risks that are common across functional areas. IDA’s financial and operational risk governance structure is built on the “three lines model” where: • Business units are responsible for directly managing risks in their respective functional areas, • The Vice President and WBG Chief Risk Officer (CRO) provides direction, challenge, and oversight over financial and operational risk activities, and • Internal Audit provides independent oversight. IDA’s risk management process comprises risk identification, assessment, response, and risk monitoring and reporting. IDA has policies and procedures under which risk owners and corporate functions are responsible for identifying, assessing, responding to, monitoring, and reporting risks. Figure 10: Financial and Operational Risk Management Structure rd Internal Audit 3 Line Risk Oversight nd CRO 2 Line Risk Coverage Financial Risk Operational Risk Risk Owners st Business Units 1 Line Risk Process Monitor and Identify Assess Respond Report Risk Oversight and Coverage Financial and Operational Risk Management The CRO oversees both financial and operational risks. These risks include (i) country credit risks in the core sovereign lending business, (ii) market and counterparty risks including liquidity risk, and (iii) operational risks relating to people, processes, and systems. In addition, the CRO works closely with IBRD, IFC, and MIGA’s management to review, measure, aggregate, and report on risks and share best practices across the WBG. The CRO also helps enhance cooperation between the entities and facilitates knowledge sharing in the risk management function. The risk of IDA’s operations not meeting the expected development outcomes (development outcome risks) in IDA’s lending activities is monitored at the corporate level by Operations Policy and Country Services (OPCS). Where fraud and corruption risks may impact IDA-financed projects, OPCS, the Regions and Practice Groups, and the Integrity Vice Presidency jointly address such issues. IDA Management’s Discussion and Analysis: June 30, 2021 33 Management’s Discussion and Analysis Section IX: Risk Management The following three departments report directly to the CRO: Credit Risk Department • Identifies, measures, monitors, and manages country credit risk faced by IDA. • Assesses loan portfolio risk and capital requirements, determines the adequacy of provisions for losses on loans and other exposures, and monitors borrowers that are vulnerable to crises in the near term. The Department assesses the consistency of country lending programs as determined in IDA’s PBA allocation framework with overall capital adequacy. • Whenever a new financial product is being considered for introduction, this department reviews any implications for country credit risk. Market and Counterparty • Responsible for market, liquidity, and counterparty credit risk oversight, Risk Department assessment, and reporting. It does these in coordination with IDA’s financial managers who are responsible for the day-to-day execution of trades for the liquid asset and derivative portfolios within applicable policy and guideline limits. • Responsible for ensuring effective oversight, which includes: i) maintaining sound credit assessments, ii) addressing transaction and product risk issues, iii) providing an independent review function, iv) monitoring market and counterparty risk in the investment, borrowing and client operation portfolios, and v) implementing the model risk governance framework. It also provides reports to the Audit Committee and the Board on the extent and nature of risks, risk management, and oversight. Operational Risk Department • Provides direction and oversight for operational risk activities by business function. • Key operational risk management responsibilities include: (i) administering the Operational Risk Committee (ORC) for IDA, (ii) implementing the operational risk management framework which is aligned with Basel principles and providing direction to business unit partners to ensure consistent application, (iii) assisting and guiding business unit partners in identifying and prioritizing significant operational risks and enabling monitoring and reporting of risks through suitable metrics (or risk indicators), (iv) helping identify emerging risks and trends through monitoring of internal and external risk events, (v) supporting risk response and mitigating activities, and preparing a corporate Operational Risk Report for review and discussion by the ORC. • The department is also responsible for business continuity management, and enterprise risk management functions. Risk Committees Figure 11: Management Risk Committee Structure for Financial and Operational Risks Financial Risk Operational Risk FRC ALCO ERC Finance and Risk Committee Asset and Liability Enterprise Risk Committee Management Committee Chair: MDCFO Chair: MDCAO Chair: MDCFO NBC ORC New Business Committee Operational Risk Committee 34 IDA Management’s Discussion and Analysis: June 30, 2021 Management’s Discussion and Analysis Section IX: Risk Management Financial Risk Committees: The Finance and Risk Committee (FRC), a Vice President level committee, provides a high-level governance structure for decisions that may have financial risks. The FRC is chaired by the Managing Director and WBG Chief Financial Officer (MDCFO) and approves, clears, or discusses: (a) risk policy and procedure documents related to financial integrity, income sustainability and balance sheet strength, and (b) issues and new business initiatives with policy implications related to IDA’s risks in the areas of finance, which include country credit, market, counterparty, liquidity, model risks, and operational risks related to the finance business functions. The FRC helps to integrate individual components of finance and risk management activities by building on mechanisms and processes already in place and provides a forum for discussing and communicating significant risk related issues. The FRC meets regularly to discuss the financial performance, new products and services, and risk management of IDA. The New Business Committee (NBC) is a standing subcommittee of the FRC. The NBC provides advice, guidance, and recommendations to the FRC, by performing due diligence over new financial products or services to ensure that management has a full understanding of the rationale, costs, risks and rewards of the product or service being considered. Asset Liability Management Committee (ALCO), a Vice President level committee chaired by the MDCFO provides a high-level forum to ensure prudent balance sheet management of IDA by: a) monitoring its financial positions and ALM activities for compliance with its respective guidelines, policies and procedures, including borrowing and investment activities; b) identifying and providing recommendations on emerging ALM issues for IDA, as well as those related to capital, balance-sheet planning, and financial sustainability; and c) serving as reviewing and recommending body for ongoing decisions as part of implementing the ALM policies and procedures of IDA, including those that impact lending rates and net income. Operational Risk Committees: The Enterprise Risk Committee (ERC) is a corporate committee that has oversight over operational and non- financial risks across IDA. Chaired by IDA’s Managing Director and Chief Administrative Officer (MDCAO), it consists of Vice President level committee members to review and discuss enterprise risk matters. Specifically, the Committee has a governance role over risk matters relating to corporate security, business continuity and IT security. Operational Risk Committee (ORC) is the main governance committee for operational risk and provides a mechanism for an integrated review and response across IDA units on operational risks associated with people, processes, and systems including business continuity, and recognizing that business units remain responsible for managing operational risks. The Committee’s key responsibilities include monitoring significant operational risk matters and events on a quarterly basis to ensure that appropriate risk-response measures are taken and reviewing and concluding on IDA’s overall operational risk profile. The ORC is chaired by the CRO and escalates significant risks/decisions to the FRC and ERC. Management of IDA’s Risks IDA assumes financial risks in order to achieve its development and strategic objectives. IDA’s financial risk management framework is designed to enable and support the institution in achieving its goals in a financially sustainable manner. IDA manages credit, market, and operational risks for its financial activities which include lending, borrowing, and investing (Table 26). The primary financial risk to IDA is the country credit risk inherent in its loan and guarantee portfolio. IDA is also exposed to risks in its liquid asset and derivative portfolios, where the major risks are interest rate, exchange rate, commercial counterparty, and liquidity risks. IDA’s operational risk management framework is based on a structured and uniform approach to identify, assess, and monitor key operational risks across business units. IDA Management’s Discussion and Analysis: June 30, 2021 35 Management’s Discussion and Analysis Section IX: Risk Management Table 26: Summary of IDA's Specific Risk Categories Types of Financial Risk How the risk is managed Credit Risk Country Credit Risk IDA’s credit-risk-bearing capacity and individual country exposure limits. Counterparty Credit Risk Counterparty credit limits and collateral. Market Risk Interest Rate Risk Interest rate derivatives to match the sensitivity of assets and liabilities. Exchange Rate Risk Currency derivatives to match the currency composition of assets and liabilities. Liquidity Risk Minimum liquidity target levels. Operational Risk Risk assessment and monitoring of key risk indicators and events. Coronavirus Disease 2019 Outbreak The 2019 outbreak of COVID-19 resulted in governments worldwide enacting emergency measures to combat the spread of the virus. These measures, which include the implementation of travel bans, quarantine periods and social distancing, have caused material disruption to businesses globally. Governments and central banks reacted with significant monetary and fiscal interventions designed to stabilize economic conditions. In light of COVID-19, IDA faces additional credit, market, and operational risks for its activities. IDA continues to monitor the developments and to manage the risks associated with all its portfolios. As of June 30, 2021, IDA had sufficient resources to meet its liquidity requirements and continues to have access to the capital markets, despite market volatility. IDA continues to maintain a robust liquidity position and flexibility to access the necessary liquidity resources. Management remains vigilant in assessing funding needs in the medium and longer-term to manage the effect of possible severe market movements. IDA’s capital remains adequate, as indicated by the DSC ratio, despite increased market volatility since the COVID- 19 outbreak (Table 27). As of the reporting date, country credit risk and counterparty credit risk remain in line with the existing governance framework and established credit limits. The loan loss provisions reflect IDA’s current assessment of country credit risk. The fair values of related financial instruments reflect counterparty cred it risk in IDA’s portfolios. Developments in the market continue to be closely monitored and managed. Home-based work continues in many World Bank offices throughout the world, in line with IDA’s Business Continuity Procedures. In addition, IDA has adopted other prudent measures to ensure the health and safety of its employees, including imposing travel restrictions and holding public events in virtual format. While the duration of the COVID-19 pandemic and its effects remain difficult to predict at this time, IDA has continued to respond to demand and operate its core business functions effectively by utilizing technology for remote work, and by leveraging its extensive local presence in client countries around the world. Management has an office reopening framework that prioritizes staff health and safety while taking into consideration risks including business continuity. The office reopening framework provides for the incremental return to office and on-site business activities in stages or “tiers,” allowing for enough time in between tiers to assess risk and preparedness indicators. IDA continues to monitor risks associated with COVID-19 and maintains plans to respond as the situation evolves. While the World Bank offices around the world are in differing operating statuses based on local conditions, IDA has started the process for a gradual reopening of offices for certain locations, including the headquarter office in Washington D.C. Capital Adequacy IDA uses a solvency-based capital adequacy model, which mandates that IDA holds capital for credit risk, market risk and operational risk covering all activities and assets on its books. The main measure of capital adequacy is the Deployable Strategic Capital (DSC), a non-GAAP measure, which is the capital available to support future commitments, over and above the current portfolio. IDA is required, by the Board, to keep the DSC at levels greater than or equal to zero percent. The DSC is calculated as the amount by which Total Resources Available (TRA) exceed 36 IDA Management’s Discussion and Analysis: June 30, 2021 Management’s Discussion and Analysis Section IX: Risk Management Total Resources Required (TRR), plus a Conservation Buffer (CB). The TRA consists of IDA’s existing equity plus accumulated provision for loan losses. The TRR is the minimum capital required to cover expected and unexpected losses, (under a stressed but still plausible downside scenario), in connection with all of IDA’s currently existing operations and assets. Within the TRR there is also a capital allowance to reflect losses that result from valuing IDA’s concessional loan portfolio in present value terms using market interest rates. This allowance is calculated using a stressed interest rate to account for a potential future rise in market interest rates. The CB is an extra buffer in the amount of 10 percent of TRA. As part of the DSC framework refinement, during FY21, adjustments were made to the TRR beginning in June 2021. TRR now include additional capital requirements to account for development grants which are approved but not yet expensed so that the full effect of grant commitments is included. This adjustment addresses the delay in expense recognition for grants made as a result of the implementation of the accounting standard update. Under the expense recognition requirements of the accounting standard update, grants are no longer expensed at commitment (approval) but generally at disbursement. TRR now also includes a reduction in capital requirements to account for the capital adequacy protection provided by long-term fixed rate borrowings against changes in market interest rates. Following a change in market interest rates, the change in the present value of IDA’s long -term fixed rate borrowings offsets the changes in the present value of loans, partially reducing the sensitivity of IDA’s capital adequacy to interest rate movements. As of June 30, 2021, the DSC was 30.4%, lower by 5.4 percentage points compared with June 30, 2020 (35.8%). The decrease in ratio is primarily driven by the DSC framework refinement. IDA’s capital continues to be adequate to support its operations. See Table 27. Table 27: Deployable Strategic Capital Ratio In billions of U.S. dollars except ratios in percentages As of June 30, 2021 2020 Total Resources Available (TRA) $ 185.7 $ 172.6 Total Resources Required (TRR) 110.6 93.5 Conservation Buffer (CB) 18.6 17.3 Deployable Strategic Capital (DSC = TRA-TRR-CB) $ 56.5 $ 61.8 Deployable Strategic Capital as a percentage of Total Resources Available 30.4% 35.8% Asset/Liability Management Capital Value Protection Program In FY20, as part of IDA’s ALM policies, IDA executed pay fixed, receive floating forward-starting swaps with a notional of $15.0 billion under a Board-approved Capital Value Protection Program. The objective of the program is to partially reduce the sensitivity of IDA’s capital adequacy model to changes in long -term interest rates and allow for more resources to be available for lending under the capital adequacy framework. Changes in the values of these forward-starting swaps partially offset changes in the present value of loans, thereby reducing the sensitivity of IDA’s capital adequacy to long-term interest rate movements and providing greater stability in IDA’s long-term financing to clients. These swaps are included under the ALM portfolio. For more details, see Notes to the Financial Statements for the year ended June 30, 2021, Note F - Derivative Instruments. Asset Coverage Principles In addition to the DSC framework, IDA has policies in place to ensure alignment of its lending and borrowing activities. Specifically, the Board approved the following asset coverage principles: • Management will monitor the level of assets available to satisfy all of IDA’s borrowings and shall adju st future lending and grant commitments should the level of asset coverage fall below the level expected for a triple-A rated entity. • Management will monitor IDA’s liquidity to ensure its ability to satisfy its borrowing and commitment obligations even under stressed conditions taking into account the level expected for a triple-A rated entity without callable capital. • If IDA’s access to the capital markets or alternative sources of cash funding is impaired, then no additional loan or grant commitments will be approved until access to cash funding has resumed or all market debt is repaid. IDA Management’s Discussion and Analysis: June 30, 2021 37 Management’s Discussion and Analysis Section IX: Risk Management Credit Risk IDA faces two types of credit risk: country credit risk and counterparty credit risk. Country credit risk is the risk of loss due to a country not meeting its contractual obligations, and counterparty credit risk is the risk of loss attributable to a counterparty not honoring its contractual obligations. IDA is exposed to commercial as well as noncommercial counterparty credit risk. Country Credit Risk IDA’s lending management framework encompasses the long-standing PBA mechanism and allocation framework agreed at each replenishment, complemented by additional considerations required when accessing debt markets to ensure adherence to risk management (capital adequacy) requirements. While the PBA framework was not originally intended as a credit quality metric, it incorporates factors related to country credit risk. The PBA determines the volume of concessional IDA resources allocated to each country, based on performance in implementing policies that promote economic growth and poverty reduction, as assessed under the Country Policy and Institutional Assessment (CPIA). The CPIA includes economic management criteria, such as fiscal policy and debt policy and management. In addition to these considerations in the PBA, IDA assesses the country credit risk of all its borrowers. IDA produces credit risk ratings for all its borrowing countries, which reflect country economic, financial, and political circumstances, and also considers environmental, social and governance (ESG) risk factors. Based on these risk ratings, to manage overall portfolio risk, the allocation outcomes of the PBA and other mechanisms are reviewed to ensure that they are compatible with the Deployable Strategic Capital Framework and Single Borrower Limit. Single Borrower Limit Portfolio concentration risk, which arises when a small group of borrowing countries account for a large share of loans outstanding, is a key consideration for IDA. Concentration risk is managed through the SBL, which caps exposure to any single borrowing country at 25 percent of equity, in line with the Basel-based maximum exposure limit. For FY22, the SBL has been set at $45 billion (25 percent of $180.9 billion of equity as of June 30, 2021), marginally higher than FY21. Currently, the maximum country exposure levels compatible with IDA’s overall capital adequacy target are lower than the SBL for all IDA-borrowing countries. As a consequence, the SBL is not currently a constraining factor. As of June 30, 2021, the ten countries with the highest exposures accounted for 66% of IDA’s total exposure (Figure 12). IDA’s largest exposure to a single borrowing country, India, was $22 billion as of June 30, 2021. Monitoring these exposures relative to the SBL, requires consideration of the repayment profiles of existing loans, as well as disbursement profiles and projected new loans and guarantees. Figure 12: Country Exposures as of June 30, 2021 In billions of U.S. dollars Top Ten Country Exposures India 22.0 Bangladesh 18.1 Pakistan 16.4 Vietnam 14.1 Nigeria 11.7 Ethiopia 11.2 Kenya 10.2 Tanzania 8.3 Ghana 5.6 Uganda 4.4 0 2 4 6 8 10 12 14 16 18 20 22 Debt Relief IDA has participated in two comprehensive debt relief initiatives, HIPC and MDRI, adopted by the global development community to reduce the debt burdens of developing countries. In each case, IDA agreed to provide debt relief in return for future compensation from members for forgone reflows, ensuring that IDA’s financial capacity would not be reduced. For a borrower to be eligible for debt relief on its loans with IDA, it is required to maintain macroeconomic stability, carry out key structural and social reforms, and maintain all loans in accrual status. 38 IDA Management’s Discussion and Analysis: June 30, 2021 Management’s Discussion and Analysis Section IX: Risk Management Expected Losses, Overdue Payments and Non-Performing Loans When a borrower fails to make payments on any principal, interest, or other charges due to IDA, IDA may suspend disbursements immediately on all loans and grants to that borrower. IDA’s current practice is to exercise this option using a gradual approach (Table 28). These practices also apply to member countries eligible to borrow from both IDA and IBRD, and whose payments on IBRD loans may become overdue. It is IDA’s practice not to reschedule service charges, interest or principal payments on its loans or participate in debt rescheduling agreements with respect to its loans. As of June 30, 2021, none of the IDA borrowing countries in the accrual portfolio had overdue payments beyond 45 days. Table 28: Treatment of Overdue Payments Where the borrower is the member country, no new loans or grants to the member country, or to any other borrower in the country, will be presented to the Board for approval nor will any previously approved loans or Overdue by 30 days grants be signed, until payments for all amounts 30 days overdue or longer have been received. Where the borrower is not the member country, no new loans or grants to that borrower will be signed or approved. In addition to the provisions cited above for payments overdue by 30 days, to avoid proceeding further on the notification process leading to suspension of disbursements, the country as borrower or guarantor and all Overdue by 45 days borrowers in the country must pay not only all payments overdue by 30 days or more, but also all payments due regardless of the number of days since they have fallen due. Where the borrower is not the member country, no new loans, or grants to, or guaranteed by, the member country, will be signed or approved. In addition to the suspension of approval for new loans or grants and signing of previously approved loans or grants, disbursements on all grants or loans to or guaranteed by the member country are suspended until all Overdue by 60 days overdue amounts are paid. This policy applies even when the borrower is not the member country. Under exceptional circumstances, disbursements can be made to a member country upon the Board’s approval. All loans made to or guaranteed by a member of IDA are placed in nonaccrual status, unless IDA determines that the overdue amount will be collected in the immediate future. Unpaid service charges and other charges not yet paid on loans outstanding are deducted from the income for the current period. To the extent that Overdue by more these payments are received, they are included in income. At the time of arrears clearance, if collectability than six months risk is considered to be particularly high, the member’s exposures may not automat ically emerge from nonaccrual status. In such instances, a decision is made on the restoration of accrual status on a case-by- case basis and in certain cases, this decision may be deferred until after a suitable period of payment performance has passed. As an exception to the practices set forth in Table 28, IDA has provided financing to countries with overdue payments, in very specific situations: • IDA has provided grants from its Crisis Response Window to third party agencies for use in Somalia and Zimbabwe in response to major crises, during FY17 and FY19 respectively, and; • IDA has financed a few regional projects, for the benefit of countries with overdue payments to IDA, through its Regional Program Window. In the past, on an exceptional basis, IDA financed through concessional loans and grants the following regional projects, where participation of a country with overdue payments was crucial to the success of the regional project. • In April 2017, the Kenya Displacement project ($103 million) through Intergovernmental Authority on Development (IGAD) that included financing for Somalia. • In December 2014, Kariba Dam Rehabilitation Project ($75 million) that included benefits for Zimbabwe. • In September 2003, West Africa HIV/AIDS project for the Abidjan-Lagos Transport Corridor ($17 million) that included benefits for Togo, a country with overdue payments at that time. In the above cases, financing was not made directly to the country with overdue payments. Implementation arrangements were such that a regional bank or another participating country took on the obligation of the regional project on behalf of the country with overdue payments to IDA. In addition, IDA may engage with countries with overdue payments when a very narrow and well-defined set of criteria are met, including a clear path to arrears clearance. For more details on exceptional financing, see Section III: IDA’s Financial Resources. Arrears Clearance On March 25, 2021, Sudan paid all of the overdue principal and charges due to IDA of $849 million and $244 million, respectively. The outstanding loans remaining to Sudan were restored to accrual status on that date, in accordance IDA Management’s Discussion and Analysis: June 30, 2021 39 Management’s Discussion and Analysis Section IX: Risk Management with IDA’s policy. For more details, see Notes to the Financial Statements for the year ended June 30, 2021, Note D – Loans and Other Exposures. Accumulated Provision for Losses on Loans and other Exposures Beginning July 1, 2020, IDA records a provision to reflect the expected losses inherent in its loan and other exposures. Prior to July 1, 2020, the provision was determined based on an incurred loss model. On July 1, 2020, IDA recorded a transition adjustment of $802 million, increasing the beginning balance of accumulated deficit. This adjustment represented the difference between the previous method and CECL. For more details, see Notes to the Financial Statements for the year ended June 30, 2021, Note A – Summary of Significant Accounting and Related Policies. A key determinant in the provision for losses on loans and other exposures is IDA’s borrowing country credit risk ratings. These ratings are IDA’s own assessment of borrowers’ ability and willingness to repay IDA on time and in full. As of June 30, 2021, IDA had $181.5 billion of loans outstanding, of which loans in nonaccrual status represent 0.5%. IDA’s total provision for losses on loans and other exposures was $4.9 billion, which represents a provisioning rate of 2.0% of the underlying exposures ($4.5 billion as of June 30, 2020, 2.7% of the underlying exposures). For a summary of countries with loans or guarantees in nonaccrual status as of June 30, 2021, see Notes to the Financial Statements for the year ended June 30, 2021, Note D–Loans and Other Exposures. Commercial Counterparty Credit Risk Commercial counterparty credit risk is the risk that counterparties fail to meet their payment obligations under the terms of the contract or other financial instruments. Effective management of counterparty credit risk is vital to the success of IDA’s funding, investment, and asset/liability management activities. The monitoring and management of these risks is continuous as the market environment evolves. IDA mitigates the counterparty credit risk from its investment and derivative holdings through the credit approval process, the use of collateral agreements and risk limits, and other monitoring procedures. The credit approval process involves evaluating counterparty and product specific creditworthiness, assigning internal credit ratings and limits, and determining the risk profile of specific transactions. Credit limits are set and monitored throughout the year. Counterparty exposure is updated daily, taking into account current market values of assets held, estimates of potential future movements of exposure for derivative instruments, and related counterparty collateral agreements. Collateral posting requirements are based on thresholds driven by public credit ratings. Collateral held includes cash and highly rated liquid investment securities. Commercial credit risk management includes ESG related assessments in the approval and monitoring of higher exposure counterparts for the liquid asset portfolio and for derivative counterparts. In addition, third-party ESG scores of the liquid asset portfolio and derivative exposures are monitored. IDA’s liquid asset portfolio consists mostly of sovereign government bonds, debt instruments issued by sovereign government agencies, and time deposits with banks. More than half of these investments are with issuers and counterparties rated triple-A or double-A (Table 30). Derivative Instruments In the normal course of its business, IDA enters into various derivative instruments to manage foreign exchange and interest rate risks. These instruments are also used to help borrowers to manage their financial risks. Derivative transactions are conducted with other financial institutions and, by their nature, entail commercial counterparty credit risk. While the volume of derivative activity can be measured by the contracted notional value of derivatives, notional value is not an accurate measure of credit or market risk. IDA uses the estimated replacement cost of the derivative instruments, or potential future exposure (PFE), to measure credit risk with counterparties. Under IDA’s mark-to-market collateral arrangements, IDA receives collateral when mark-to-market exposure is greater than the ratings-based collateral threshold. As of June 30, 2021, IDA did not receive any cash collateral for its derivative transactions (June 30, 2020 – $2 million). IDA is not required to post collateral under its derivative agreements as long as it maintains a triple-A credit rating. (For the contractual value, notional amounts, related credit risk exposure amounts, and the amount IDA would be required to post in the event of a downgrade, see Notes to the Financial Statements for the year ended June 30, 2021, Note F–Derivative Instruments). 40 IDA Management’s Discussion and Analysis: June 30, 2021 Management’s Discussion and Analysis Section IX: Risk Management Investment Securities IDA’s Board-approved General Investment Authorization provides the basic authority for IDA to invest its liquid assets. Furthermore, all investment activities are conducted in accordance with a more detailed set of Investment Guidelines set by management. The Investment Guidelines are approved by the MDCFO and implemented by the Treasurer. The most recent update was in FY18, to incorporate the changes required under the IDA18 hybrid financing model. Issuer and product investment eligibility and risk parameters relative to benchmarks are core components of these Guidelines. The Guidelines also include a consultative loss limit to reflect a level of tolerance for the risk of underperforming the benchmark in any fiscal year and a duration deviation metric. Clear lines of responsibility for risk monitoring and compliance are highlighted in the Guidelines. Credit risk appetite is conveyed through specific eligibility criteria (Table 29). IDA has procedures in place to monitor performance against this limit and potential risks, and it takes appropriate actions if the limit is reached. All investments are subject to additional conditions specified by the Chief Risk Officer department, as deemed necessary. Table 29: Eligibility Criteria for IDA’s Investments Eligible Investments a Description IDA may only invest in obligations issued or unconditionally guaranteed by governments of Sovereigns member countries with a minimum credit rating of AA-. However, no rating is required if government obligations are denominated in the national currency of the issuer. IDA may invest only in obligations issued by an agency or instrumentality of a government of a Agencies member country, a multilateral organization, or any other official entity other than the government of a member country, with a minimum credit rating of AA-. Corporates and asset-backed securities IDA may only invest in securities with a triple-A credit rating. IDA may only invest in time deposits issued or guaranteed by financial institutions, whose senior Time deposits b debt securities are rated at least A-. Commercial paper IDA may only invest in short-term borrowings (less than 190 days) from commercial banks, corporates, and financial institutions with at least two Prime-1 ratings. Securities lending, and borrowing, IDA may engage in securities lending, against adequate collateral repurchases and reverse repurchases, resales, and reverse repurchases, against adequate margin protection, of the securities described under the repurchases sovereigns, agencies, and corporates and asset-backed security categories. IDA may engage in collateralized forward transactions, such as swap, repurchase, resale, Collateral assets securities lending, or equivalent transactions that involve certain underlying assets not independently eligible for investment. In each case, adequate margin protection needs to be received. a. All investments are subject to approval by the Market and Counterparty Risk department and must appear on the “Approved List” created by the department. b. Time deposits include certificates of deposit, bankers’ acceptances and other obligations issued or unconditionally guarantee d by banks or other financial institutions. The credit quality of IDA’s investment portfolio remains in the upper en d of the credit spectrum with 68% of the portfolio rated AA or above as of June 30, 2021, reflecting IDA’s continued preference for highly-rated securities and counterparties across all categories of financial instruments. Total commercial counterparty credit exposure, net of collateral held, was $37,521 million as of June 30, 2021. Commercial Counterparty Credit Risk Exposure As a result of IDA’s use of mark-to-market collateral arrangements for swap transactions, its residual commercial counterparty credit risk exposure is concentrated in the investment portfolio, in instruments issued by sovereign governments and non-sovereign holdings (including agencies, asset backed securities, corporates, and time deposits). (See Table 30). Table 30: Commercial Credit Exposure, Net of Collateral Held, by Counterparty Rating In millions of U.S. dollars, except rates in percentages As of June 30, 2021 Counterparty Rating a Sovereigns Non-Sovereigns Net Swap Exposure Total Exposure % of Total AAA $ 9,345 $ 6,023 $ - $ 15,368 41 AA 2,519 7,438 179 10,136 27 A 7,571 4,378 68 12,017 32 BBB or below - - - - - Total $ 19,435 $ 17,839 $ 247 $ 37,521 100 IDA Management’s Discussion and Analysis: June 30, 2021 41 Management’s Discussion and Analysis Section IX: Risk Management As of June 30, 2020 Counterparty Rating a Sovereigns Non-Sovereigns Net Swap Exposure Total Exposure % of Total AAA $ 2,814 $ 6,617 $ - $ 9,431 27 AA 2,221 6,997 106 9,324 27 A 11,886 3,832 46 15,764 46 BBB or below - * - * * Total $ 16,921 $ 17,446 $ 152 $ 34,519 100 a. Average rating is calculated using available ratings from the three major rating agencies; however, if ratings are not available from each of the three rating agencies, IDA uses the average of the ratings available from any of such rating agencies or a single rating to the extent that an instrument or issuer (as applicable) is rated by only one rating agency. * Indicates amount less than $0.5 million or percentage less than 0.5%. For the contractual value, notional amounts and related credit risk exposure amounts by instrument see Notes to the Financial Statements for the year ended June 30, 2021, Note F - Derivative Instruments. Credit and Debit Valuation Adjustments Most outstanding derivative positions are transacted over-the-counter and therefore valued using internally developed valuation models. For commercial and non-commercial counterparties where IDA has a net exposure (net receivable position), IDA calculates a Credit Valuation Adjustment (CVA) to reflect credit risk. For net derivative positions with commercial and non-commercial counterparties where IDA is in a net payable position, IDA calculates a Debit Valuation Adjustment (DVA) to reflect its own credit risk. The CVA is calculated using the fair value of the derivative contracts, net of collateral received under credit support agreements, and the probability of counterparty default based on the Credit Default Swaps (CDS) spread and, where applicable, proxy CDS spreads. IDA does not currently hedge this exposure. The DVA calculation is generally consistent with the CVA methodology and incorporates IDA’s own credit spread as observed through the CDS market. As of June 30, 2021, IDA recorded a CVA on its balance sheet of $2 million, and a DVA of $6 million, on outstanding derivatives. Market Risk IDA is exposed to changes in interest and exchange rates. The introduction of market debt financing into IDA’s business model from FY18 presents additional exposures. The impending discontinuance of LIBOR and the transition to alternative reference rates also presents a significant risk to IDA’s business activities. IDA uses derivatives to manage its exposure to various market risks. These are used to align the interest and currency composition of its assets (loan and investment trading portfolios) with that of its liabilities (borrowing portfolio) and equity. Figure 13 below illustrates the use of derivatives for market borrowing portfolios. Loan and investment portfolios are largely maintained in SDR and its component currencies. Figure 13: Use of Derivatives for Market Borrowings Interest Rate Risk IDA is exposed to interest rate risk due to mismatches between its assets (loan and investment portfolios) and its liabilities (borrowing portfolio) both in terms of maturity and instrument type. Given IDA’s lengthy disbursement profile, the duration of IDA’s loans is relatively long. This long duration, combined with volatility in market interest rates, would result in significant year-on-year variability in the fair value of equity. However, since the loan portfolio is not reported at fair value under U.S. GAAP the impact of this variability on IDA’s Balance Sheet is not fully evident. 42 IDA Management’s Discussion and Analysis: June 30, 2021 Management’s Discussion and Analysis Section IX: Risk Management As of June 30, 2021, IDA’s investment-trading portfolio (liquid asset portfolio) had a duration of four months. Low and negative fixed interest rates present a challenge for the investment of the liquid asset portfolio. During FY21, this portfolio experienced unrealized mark-to-market losses of $40 million, excluding positive returns from IDA’s share of PEBP earnings, as a result of the increase in yield curves ($187 million of unrealized mark-to-market gains in FY20). Under its integrated financing model, IDA employs the following strategies to continue to enhance its management of interest rate risk: • The capital adequacy policies factor in the sensitivity to interest rates. • Matching interest rates between assets and related funding to minimize open interest rate positions. • The funding risk related to the mismatch between the maturity profile of the debt funding and the related assets is monitored through duration measurements and adjustments to capital requirements to cover this risk. Alternative Reference Rate In July 2017, the Financial Conduct Authority (FCA), the regulator of the London Interbank Offered Rate (LIBOR), announced that it would no longer compel panel banks to submit rates required to calculate LIBOR after December 31, 2021. Therefore, market participants, including IDA and its borrowers, need to move to alternative reference rates because the availability of LIBOR after this date is not a certainty. In March 2021, the FCA confirmed that all LIBOR settings will either cease to be provided by any administrator or will no longer be representative, as follows: • All sterling, euro, Swiss franc and Japanese yen LIBOR settings, and the 1-week and 2-month U.S. dollar LIBOR settings, will cease immediately following publication on December 31, 2021. • All remaining U.S. dollar LIBOR settings, including the 6-month U.S. dollar LIBOR used as the reference rate for IDA loans, will cease immediately following its publication on June 30, 2023. Despite the extension of the publication of certain U.S. dollar LIBOR rates to June 30, 2023, the regulators’ guidance remains that LIBOR should not be used for new contracts after 2021. In consideration of the regulatory guidance and in preparations for the global markets’ transition away from LIBOR, IDA has taken important steps to facilitate a smooth and orderly transition of its financial instruments effected by alternative reference rates. IDA previously completed an initial impact assessment of its exposure, both quantitatively and qualitatively, to LIBOR and developed an implementation roadmap for the LIBOR transition. IDA is actively working through this transition and is analyzing the impact from multiple perspectives: lending, funding, accounting, operations, information technology, liquidity investing, risk and legal, considering the portfolio of existing loans and other instruments that use LIBOR as a benchmark. Although most of IDA’s loans are on fixed rate concessional terms, for IDA’s LIBOR based non-concessional and hard-term loans, in FY20, IDA’s Executive Directors endorsed an omnibus amendment process with borrowers for loan agreements, where relevant, to address the replacement of LIBOR, allowing IDA to maintain the principles of fairness and equivalence for any replacement reference rate. The contract amendments will enable similar treatment to all loans by bringing the fallback provisions related to changes in the reference rate in the General Conditions into conformity with the revised General Conditions of December 2018. The new language permits IDA to transition the interest rate to alternative reference rates when a suitable alternative is available, and it is appropriate to do so. To date, IDA has made significant progress in securing counter-signature of the omnibus amendments from the borrowing countries. IDA is also using pre-existing provisions in loan agreements to implement these changes. In addition, as the market undergoes fundamental changes due to the transition to alternative reference rates, as a part of its interest rate risk management, on January 26, 2021, IDA suspended the offering of non-concessional loans on fixed spread terms as well as the suspension of a related conversion feature from the variable spread terms to fixed spread terms, effective from April 1, 2021. An existing feature to permit fixing of the reference rate in loans with variable spread terms remains available. While IDA’s primary product is fixed rate loans that is not dependent on a reference rate (see Section V: Development Activities, Products and Programs), IDA does offer certain borrowers non-concessional terms based on the lending rate of IBRD loan products (See Table 16). In July 2021, the Board approved offering new loans with new alternative reference rates and ceasing to offer LIBOR based loans effective January 1, 2022 for all variable spread loans. Careful consideration was given to the regulatory guidance, relevant provisions in IDA’s General Conditions and loan IDA Management’s Discussion and Analysis: June 30, 2021 43 Management’s Discussion and Analysis Section IX: Risk Management agreements, ALM needs, as well as borrower implications. As a result of the different characteristics of the new market reference rates and LIBOR and the implications of a staggered LIBOR cessation timetable, there will be changes to the current loan processes for non-concessional loans, including billing and cost-pass through methodologies used for IBRD lending rates. However, the impact of these changes will be limited as IDA’s non -concessional loans portfolio represented 3% of the total loans outstanding as of June 30, 2021. IDA will continue to work with key stakeholders, including internal subject matter experts, senior management, borrowers, industry groups and other market participants, to mitigate potential financial and operational risks to which IDA is exposed and to ensure an orderly transition to alternative reference rates. IDA is managing the transition prudently and in a cost-effective manner. Exchange Rate Risk IDA faces foreign exchange rate risk exposure as a result of the currency mismatch between its commitments for loans and grants, which are mainly denominated in SDRs; equity contributions from members, which are typically denominated in national currencies; and the portion of IDA’s internal resources and expenditures that are denominated in U.S. dollars. Changes in exchange rates affect the capital adequacy of IDA when the currency of the equity supporting the loan portfolio and other assets is different from that of the risk exposure. Accordingly, the primary objective of IDA’s currency risk management is to protect IDA’s financial capacity, as measured by the capital adequacy framework , from exchange rate movements. To achieve this, IDA’s balance sheet is managed in multiple currencies: SDR and the currencies comprising the SDR basket. The exchange rate risk management methodology includes the hedging of: (i) currency risk arising from settlement of loan disbursements, loan repayments and donor contributions; (ii) debt funding; (iii) IDA loans; (iv) donor contributions; and (v) administrative budget. The reported levels of its assets, liabilities, income, and expenses in the financial statements are affected by exchange rate movements in all the currencies in which IDA transacts, relative to its reporting currency, the U.S. dollar. These movements are shown as currency translation adjustments. Translation adjustments relating to the revaluation of assets and liabilities denominated in SDR and SDR component currencies, (IDA’s functional currencies), are reflected in Accumulated Other Comprehensive Income (Loss), in equity. Translation adjustments relating to non-functional currencies are reported in IDA’s Statement of Income (see Notes to the Financial Statements for the year ended June 30, 2021, Note A – Summary of Significant Accounting and Related Policies). IDA uses currency forward contracts to convert future inflows from members’ receivables provided in national currencies into the five currencies of the SDR basket, thereby aligning the currency composition of member contributions with the net cash outflows relating to loans and grants, which are primarily denominated in SDR. Liquidity Risk Liquidity risk arises in the general funding of IDA’s activities and in managing its financial position. It includes the risk of IDA being unable to fund its portfolio of assets at appropriate maturities and rates, and the risk of being unable to liquidate a position in a timely manner at a reasonable price. IDA’s aggregate liquid asset holdings are kept above a specified prudential minimum to safeguard against cash flow interruptions. The Prudential Minimum is equal to 80% of 24 months of projected net outflows. For FY21, the prudential minimum was $21.2 billion. For FY22, the prudential minimum has been set at $19.3 billion. As of June 30, 2021, IDA’s liquid assets were 177% of the prudential minimum. IDA will hold liquidity above the prudential minimum to ensure sufficient liquidity under a wide range of shock scenarios as well as to give it flexibility in timing its borrowing transactions and to meet working capital needs. Operational Risk Operational risk is defined as the risk of financial loss, or damage to IDA’s reputation resulting from inadequate or failed internal processes, people, and systems, or from external events. IDA recognizes the importance of operational risk management activities, which are embedded in its financial operations. As part of its business activities, IDA is exposed to a range of operational risks including physical security and staff health and safety, data and cyber security, business continuity, and external vendor risks. IDA’s approach to identifying and managing operational risk includes a dedicated program for these risks and a robust process that 44 IDA Management’s Discussion and Analysis: June 30, 2021 Management’s Discussion and Analysis Section IX: Risk Management includes identifying, assessing and prioritizing operational risks, monitoring and reporting relevant key risk indicators, aggregating and analyzing internal and external events, and identifying emerging risks that may affect business units and developing risk response and mitigating actions. Cybersecurity Risk Management IDA’s operations rely on the secure processing, storage , and transmission of confidential and other information in computer systems and networks. As is the case for financial institutions generally, cybersecurity risk continues to be significant for IDA due to the evolving sophistication and complexity of the cyber threat landscape. These risks are unavoidable, and IDA seeks to manage them on a cost-effective basis consistent with its risk appetite. To protect the security of its computer systems, software, networks and other technology assets, IDA has developed its cybersecurity risk management program, consisting of cybersecurity policies, procedures, compliance, and awareness programs. IDA deploys a multi-layered approach for cybersecurity risk management to help prevent and detect malicious activity, both from within the organization and from external sources. In managing emerging cyber threats such as malware including ransomware, denial of service and phishing attacks, IDA strives to adapt its technical and process-level controls and raise the level of user awareness to mitigate the risk. IDA periodically assesses the maturity and effectiveness of its cyber defenses, through risk mitigation techniques, including but not limited to, targeted testing, internal and external audits, incident response desktop exercises and industry benchmarking. IDA Management’s Discussion and Analysis: June 30, 2021 45 Management’s Discussion and Analysis Section X: Critical Accounting Policies and the Use of Estimates Section X: Critical Accounting Policies and the Use of Estimates IDA’s significant accounting policies, as well as estimates made by management, are integral to its financial reporting. While all of these policies require a certain level of judgment and estimates, significant policies require management to make highly difficult, complex, and subjective judgments as these relate to matters inherently uncertain and susceptible to change. Note A to the financial statements contains a summary of IDA’s significant accounting policies including a discussion of recently issued accounting pronouncements. Fair Value of Financial Instruments All fair value adjustments are recognized through the Statement of Income, except for changes in the fair value of debt related to IDA’s own credit, which are reported in Other Comprehensive Income. The fair values of financial instruments are based on a three-level hierarchy. For financial instruments classified as Level 1 or 2, less judgment is applied in arriving at fair value measures as the inputs are based on observable market data. For financial instruments classified as Level 3, unobservable inputs are used. These require management to make important assumptions and judgments in determining fair value measures. Derivative contracts include currency forward contracts, to-be-announced (TBA) securities, swaptions, exchange traded options and futures contracts, currency swaps, and interest rate swaps. Plain vanilla swaps, and structured swaps are valued using the standard discounted cash flow methods using observable market inputs such as yield curves, foreign exchange rates and basis spreads. In instances where management relies on instrument valuations supplied by external pricing vendors, there are procedures in place to validate the appropriateness of the models used as well as the inputs applied in determining those values. The majority of IDA’s financial instruments which are recorded at fair value are classified as Level 1 and Level 2 as of June 30, 2021, as the inputs are based on observable market data and less judgment is applied in arriving at fair value measures. On a quarterly basis, the methodology, inputs, and assumptions are reviewed to assess the appropriateness of the fair value hierarchy classification of each financial instrument. All the financial models used for input to IDA’s financial statements are subject to both internal and periodic external verification and review by qualified personnel. Provision for Losses on Loans and Other Exposures On July 1, 2020, IDA adopted ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326) which introduced a new approach to credit loss measurement - the Current Expected Credit Losses methodology and required additional disclosures. See Notes to the Financial Statements for the year ended June 30, 2021, Note A – Summary of Significant Accounting and Related Policies. For IDA, the primary changes, compared to the previous approach under U.S. GAAP, were to evaluate estimated exposures over the life of the instrument, to incorporate undisbursed loan commitments in the measure of exposure and to incorporate estimations of future market conditions for a reasonable and supportable forecast period along with historical experience. The overall provision for expected losses is the sum of the computed annual losses, taking into account borrower risk ratings and associated expected default frequencies, estimates of exposure, and severity of loss given default. IDA’s accumulated provision for losses on loans and other exposures reflects the expected losses inherent in its nonaccrual and accrual portfolios after taking into consideration the expected relief under the HIPC Debt Initiative and MDRI and any provision for losses on the buy-down of loans. Adjustments to the accumulated provision are recorded as a charge to or a release of provision in the Statement of Income. Actual losses may differ from expected losses due to unforeseen changes in any of the factors that affect borrowers’ creditworthiness. The Credit Risk Committee monitors aspects of country credit risk, in particular, reviewing the provision for losses on loans and guarantees taking into account, among other factors, any changes in exposure, risk ratings of borrowing member countries, or movements between the accrual and nonaccrual portfolios. 46 IDA Management’s Discussion and Analysis: June 30, 2021 Management’s Discussion and Analysis Section X: Critical Accounting Policies and the Use of Estimates Additional information on IDA’s provisioning policy and the status of nonaccrual loans can be found in the Notes to Financial Statements for the year ended June 30, 2021, Note A-Summary of Significant Accounting and Related Policies and Note D- Loans and Other Exposures. Provision for HIPC Debt Initiative and MDRI The HIPC Debt Initiative is a comprehensive approach to reduce the external debt of the world’s poorest, most heavily indebted countries. See Section VI: Other Development Activities and Programs and Section IX: Risk Management. The list of countries potentially eligible under the HIPC framework has been limited. No new countries are considered for eligibility unless they met the criteria at the end of 2004 as specified in the initiative. The MDRI, approved by the Board in June 2006, provides additional debt relief through cancellation of eligible debt owed to IDA by countries that reach the HIPC Completion Point. IDA records a provision for all the estimated probable write-offs of loans outstanding for debt relief to be delivered under the HIPC Debt Initiative and MDRI. Donors have agreed to compensate IDA through member contributions for the foregone loan reflows under the HIPC Debt Initiative and MDRI. The adequacy of the accumulated provision for the HIPC Debt Initiative and MDRI is based on both quantitative and qualitative analyses of various factors, including estimates of Decision and Completion Point dates of eligible countries. IDA periodically reviews these factors and reassesses the adequacy of the accumulated provision for the HIPC Debt Initiative and MDRI. Adjustments to the accumulated provision are recorded as a charge to or release of provision in the Statement of income. IDA Management’s Discussion and Analysis: June 30, 2021 47 Management’s Discussion and Analysis Section XI: Governance and Internal Controls Section XI: Governance and Internal Controls Figure 14: Governance Structure Board of Governors Executive Committee on Development Audit Committee Directors Effectiveness Budget Committee Committee on Governance and Executive Directors’ Administrative Matters Human Resources President Committee Business Conduct The WBG promotes a positive work environment in which staff members understand their ethical obligations to the institution. In support of this commitment, the institution has in place a Code of Conduct. The WBG has both an Ethics Helpline and a Fraud and Corruption hotline. A third-party service offers many methods of worldwide communication. Reporting channels include telephone, mail, email, or confidential submission through a website. IDA has in place procedures for receiving, retaining, and handling recommendations and concerns relating to business conduct identified during the accounting, internal control, and auditing processes. WBG staff rules clarify and codify the staff’s obligations in reporting suspected fraud, corruption, or other misconduct that may threaten the operations or governance of the WBG. These rules also offer protection from retaliation. General Governance IDA’s decision-making structure consists of the Board of Governors, the Executive Directors, the President, management, and staff. The Board of Governors is the highest decision-making authority. Governors are appointed by their member governments for a five-year term, which is renewable. The Board of Governors may delegate authority to the Executive Directors (referred to as the Board in this document) to exercise any of its powers, except for certain powers enumerated in the IDA Articles. IDA has its own policies and frameworks that are carried out by staff that share responsibilities for both IDA and IBRD. Executive Directors In accordance with the Articles, Executive Directors are appointed or elected every two years by their member governments. The Board currently has 25 Executive Directors who represent all 173-member countries. Executive Directors are neither officers nor staff of IDA. The President is the only member of the Board from management, and he serves as a non-voting member and as Chairman of the Board. The Board is required to consider proposals made by the President on IDA loans, grants, and guarantees and on other policies that affect its general operations. The Board is also responsible for presenting to the Board of Governors, at the Annual Meetings, audited accounts, an administrative budget, and an annual report on operations and policies and other matters. The Board and its committees are in sessions as business requires. Each committee's terms of reference establish its respective roles and responsibilities. In light of the COVID-19 situation, currently, the committee meetings are held in a virtual format. As committees do not vote on issues, their role is primarily to serve the Board in discharging its responsibilities. The committees are made up of eight members and function under their respective terms of reference. These committees are as follows: 48 IDA Management’s Discussion and Analysis: June 30, 2021 Management’s Discussion and Analysis Section XI: Governance and Internal Controls • Audit Committee - assists the Boards in overseeing IDA’s finances, accounting, risk management and internal controls (See further explanation below). • Budget Committee - assists the Boards in approving the World Bank’s budget and in overseeing the preparation and execution of IDA’s business plans. The committee provides guidance to management on strategic directions of IDA. • Committee on Development Effectiveness - supports the Boards in assessing IDA’s development effectiveness, providing guidance on strategic directions of IDA, monitoring the quality and results of operations. • Committee on Governance and Executive Directors’ Administrative Matters - assists the Boards in issues related to the governance of IDA, the Boards’ own effectiveness, and the a dministrative policy applicable to Executive Directors’ offices. • Human Resources Committee - strengthens the efficiency and effectiveness of the Board in discharging its oversight responsibility on the World Bank’s human resources strategy, policies and practices, and their alignment with the business needs of the organization. Audit Committee Membership The Audit Committee consists of eight Executive Directors. Membership in the Audit Committee is determined by the Board, based on nominations by the Chairman of the Board, following informal consultation with Executive Directors. Key Responsibilities The Audit Committee is appointed by the Board for the primary purpose of assisting the Board in overseeing IDA’s finances, accounting, risk management, internal controls, and institutional integrity. Specific responsibilities include: • Oversight of the integrity of IDA’s financial statements. • Appointment, qualifications, independence, and performance of the External Auditor. • Performance of the Group Internal Audit Vice Presidency. • Adequacy and effectiveness of financial and accounting policies and internal controls and the mechanisms to deter, prevent and penalize fraud and corruption in IDA operations and corporate procurement. • Effective management of financial, fiduciary and compliance risks in IDA. • Oversight of the institutional arrangements and processes for risk management across IDA. In carrying out its role, the Audit Committee discusses financial issues and policies that affect IDA’s financial position and capital adequacy, with management, external auditors, and internal auditors. It also recommends the annual audited financial statements for approval to the Board. The Audit Committee monitors and reviews developments in corporate governance and its own role on an ongoing basis. Executive Sessions Under the Audit Committee's terms of reference, it may convene an executive session at any time, without management’s presence. The Audit Committee meets separately in executive session with the external and internal auditors. Access to Resources and to Management Throughout the year, the Audit Committee receives a large volume of information to enable it to carry out its duties and meets both formally and informally throughout the year to discuss relevant matters. It has complete access to management, and reviews and discusses with management topics considered in its terms of reference. The Audit Committee has the authority to seek advice and assistance from outside legal, accounting, or other advisors as it deems necessary. IDA Management’s Discussion and Analysis: June 30, 2021 49 Management’s Discussion and Analysis Section XI: Governance and Internal Controls Auditor Independence The appointment of the external auditor for IDA is governed by a set of Board-approved principles. These include: • Limits on the external auditor’s provision of non-audit-related services; • Requiring all audit-related services to be pre-approved on a case-by-case basis by the Board, upon recommendation of the Audit Committee; and • Renewal of the external audit contract every five years, with a limit of two consecutive terms and mandatory rotation thereafter. The external auditor may provide non-prohibited, non-audit related services subject to monetary limits. Broadly, the list of prohibited non-audit services includes those that would put the external auditor in the roles typically performed by management and in a position of auditing their own work, such as accounting services, internal audit services, and provision of investment advice. The total non-audit services fees over the term of the relevant external audit contract shall not exceed 70 percent of the audit fees over the same period. Communication between the external auditor and the Audit Committee is ongoing and carried out as often as deemed necessary by either party. The Audit Committee meets periodically with the external auditor and individual committee members have independent access to the external auditor. IDA’s external auditors also follow the communication requirements with the Audit Committee set out under generally accepted auditing standards in the United States. External Auditors The external auditor is appointed to a five-year term, with a limit of two consecutive terms, and is subject to annual reappointment based on the recommendation of the Audit Committee and approval of a resolution by the Board. Following a mandatory rebidding of the external audit contract, IDA’s Executive Directors approved the selection of Deloitte & Touche LLP as IDA’s external auditor for a five-year term commencing FY19, subject to annual reappointment. Senior Management Changes There were no senior management changes during the year. Internal Controls Internal Control over Financial Reporting Each fiscal year, management evaluates the internal control over financial reporting to determine whether any changes made in these controls during the fiscal year materially affect, or would be reasonably likely to materially affect, IDA’s internal control over financial reporting. The internal contro l framework promulgated by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), “Internal Control - Integrated Framework (2013)” provides guidance for designing, implementing, and conducting internal control and assessing its effectiveness. IDA uses the 2013 COSO framework to assess the effectiveness of the internal control over financial reporting. As of June 30, 2021, management maintained effective internal control over financial reporting. See “Management’s report regarding effectiveness of Internal Control over Financial Reporting” on page 54. IDA’s internal control over financial reporting was audited by Deloitte & Touche LLP, and their report expresses an unqualified opinion on the effectiveness of IDA’s internal control over f inancial reporting as of June 30, 2021. See Independent Auditor’s Report on page 56. Disclosure Controls and Procedures Disclosure controls and procedures are designed to ensure that information required to be disclosed is gathered and communicated to management as appropriate, to allow timely decisions regarding required disclosure by IDA. Management conducted an evaluation of the effectiveness of such controls and procedures and the President and the MDCFO have concluded that these controls and procedures were effective as of June 30, 2021. 50 IDA Management’s Discussion and Analysis: June 30, 2021 Management’s Discussion and Analysis Appendix Appendix Glossary of Terms Blend Borrower: IDA Member that is eligible to borrow from IDA on the basis of per capita income and is also eligible to borrow from IBRD. Given the access to both sources of funds, blend borrowers are expected to limit IDA funding to social sector projects and to use IBRD resources for projects in the other sectors. Board: The Executive Directors as established by IDA’s Articles of A greement. Replenishment Envelope: Total value of resources available during a particular replenishment including member equity contributions, borrowings, internal resources, IBRD transfers, IFC grants and other resources. Completion Point: When conditions specified in the legal notification sent to a country are met and the country’s other creditors have confirmed their full participation in the HIPC debt relief initiative. When a country reaches its Completion Point, IDA’s commitment to provide the total debt relief for which the country is eligible, becomes irrevocable. Consultative Loss Limit: Reflects a level of IDA’s tolerance for risk of underperforming the benchmark in any fiscal year. Credit Valuation Adjustment (CVA): The CVA represents the counterparty credit risk exposure and is reflected in the fair value of derivative instruments. Debit Valuation Adjustment (DVA): Debit Valuation Adjustment on Fair Value Option (FVO) Elected Liabilities that corresponds to the change in fair value of the liability presented under the FVO that relate to the instrument specific credit risk (“own-credit risk”). Deputies: Representatives of IDA’s contributing partners, known as “the IDA Deputies”. Duration: Provides an indication of the sensitivity of underlying yield to changes in interest rates. Encashment: Draw down (payment in cash) of a demand note in accordance with a schedule agreed for each replenishment. Externally Financed Output (EFO): An instrument for receiving external contributions to support the Bank’s work program, typically, for amounts under $1 million, however larger amounts can also be received. Graduate Member: A member country that was once eligible to borrow from IDA, however due to improvements in the member’s economic results is no longer eligible to borrow from IDA and is deemed to have “graduated” to IBRD. Instrument of Commitment (IoC): The instrument through which a government commits to make a subscription or a subscription and contribution to IDA’s resources. Lending operations: Total projects from a fiscal year based on project approval date as of June 30 of the fiscal year. Net Commitments: Commitments of Loans, grants and guarantees, net of full cancellations and terminations approved in the same fiscal year. Net Disbursements: Loans and grant disbursements net of repayments and prepayments. Prudential Minimum: The minimum amount of liquidity that IDA is required to hold. It represents 80% of twenty- four months coverage as calculated at the start of every fiscal year. Replenishment: The process of regular review of the adequacy of IDA resources and authorization of additional subscriptions. Under IDA’s Articles, replenishments are required to be approved by IDA’s Board of Governors by a two-thirds majority of the total voting power. Special Drawing Rights (SDR): The SDR is an international reserve asset, created by the International Monetary Fund in 1969 to supplement the existing official reserves of member countries. The SDR is defined as a basket of currencies, consisting of the Chinese Renminbi, Euro, Japanese Yen, Pound Sterling, and U.S. dollar. The basket composition is reviewed every five years to ensure that it reflects the relative importance of currencies in the world’s trading and financial systems. Voting Rights: IDA’s voting rights consist of a combination of membership and subscription votes. World Bank (WB): The World Bank consists of IBRD and IDA. World Bank Group (WBG): The World Bank Group consists of the IBRD, IDA, IFC, MIGA and ICSID. IDA Management’s Discussion and Analysis: June 30, 2021 51 Management’s Discussion and Analysis Appendix List of Tables, Figures and Boxes Tables Table 1: Adjusted IDA19 Resource Allocation 8 Table 2: Cumulative Net Commitments under IDA19 9 Table 3: Utilization of PSW Commitments 12 Table 4: Condensed Statement of Income 14 Table 5: Condensed Balance Sheet 15 Table 6: Changes in Equity 15 Table 7: Net Loans Outstanding Activity 16 Table 8: Gross Disbursements of Loans and Grants by Region 16 Table 9: Revenue and Balances by Product Category 17 Table 10: Net Non-Interest Expenses 18 Table 11: Other Revenue (Expenses), net 18 Table 12: Budget Anchor 19 Table 13: Provision for losses on loans and other exposures 19 Table 14: Unrealized Mark-to-Market gains (losses) on non-trading portfolios, net 20 Table 15: Cumulative Loans approved under Single Currency program 23 Table 16: Summary of Financial Terms for IDA Lending Products, effective July 1, 2021 23 Table 17: Net Commitments of Loans and Guarantees by Region 24 Table 18: Net Commitments of Grants by Region 25 Table 19: Types of Guarantees 26 Table 20: Pricing for IDA’s Project-Based and Policy-Based Guarantees, effective July 1, 2021 26 Table 21: Cash and Investment Assets Held in Trust by IDA 28 Table 22: Liquid Asset Portfolio Composition 29 Table 23: Average Balances and Returns by Sub-Portfolio 30 Table 24: Borrowings 31 Table 25: Other Short-Term Borrowings 32 Table 26: Summary of IDA's Specific Risk Categories 36 Table 27: Deployable Strategic Capital Ratio 37 Table 28: Treatment of Overdue Payments 39 Table 29: Eligibility Criteria for IDA’s Investments 41 Table 30: Commercial Credit Exposure, Net of Collateral Held, by Counterparty Rating 41 Figures Figure 1: IDA's Financial Business Model 7 Figure 2: Net Loans Outstanding 16 Figure 3: Net Investment Portfolio 17 Figure 4: Net Investment Revenue 17 Figure 5: Budget Anchor 19 Figure 6: Net Annual Commitments and share of financing categories 22 Figure 7: Net Investment Portfolio 29 Figure 8: Effect of Derivatives on Currency Composition of the Borrowing Portfolio–June 30, 2021 31 Figure 9: Medium- and Long-Term Borrowings Issued by Currency during the year, Excluding Derivatives 32 Figure 10: Financial and Operational Risk Management Structure 33 Figure 11: Management Risk Committee Structure for Financial and Operational Risks 34 Figure 12: Country Exposures as of June 30, 2021 38 Figure 13: Use of Derivatives for Market Borrowings 42 Figure 14: Governance Structure 48 Boxes Box 1: Selected Financial Data 2 Box 2: Financing Principles 21 52 IDA Management’s Discussion and Analysis: June 30, 2021 INTERNATIONAL DEVELOPMENT ASSOCIATION (IDA) FINANCIAL STATEMENTS AND INTERNAL CONTROL REPORTS JUNE 30, 2021 Management’s Report Regarding Effectiveness of Internal Control Over Financial Reporting 54 Independent Auditors’ Report on Effectiveness of Internal Control Over Financial Reporting 56 Independent Auditors’ Report 58 Balance Sheet 60 Statement of Income 62 Statement of Comprehensive Income 63 Statement of Changes in Accumulated Deficit 63 Statement of Cash Flows 64 Supplementary Information Summary Statement of Loans 66 Statement of Voting Power and Subscriptions and Contributions 69 Notes to Financial Statements 73 IDA FINANCIAL STATEMENTS: JUNE 30, 2021 53 MANAGEMENT’S REPORT REGARDING EFFECTIVENESS OF INTERNAL CONTROL OVER EXTERNAL FINANCIAL REPORTING Management’s Report Regarding Effectiveness of Internal Control over Financial Reporting August 6, 2021 The management of the International Development Association (IDA) is responsible for the preparation, integrity, and fair presentation of its published financial statements. The financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and include amounts based on informed judgments and estimates made by management. The financial statements have been audited by an independent audit firm, which was given unrestricted access to all financial records and related data, including minutes of all meetings of the Executive Directors and their Committees. Management believes that all representations made to the independent auditors during their audit of IDA’s financial statements and audit of its internal control over financial reporting were valid and appropriate. The independent auditors’ reports accompany the audited financial statements. Management is responsible for establishing and maintaining effective internal control over financial reporting for financial statement presentations in conformity with accounting principles generally accepted in the United States of America. Management maintains a comprehensive system of controls intended to ensure that transactions are executed in accordance with management’s authorization, assets are safeguarded, and financial records are reliable. The system of internal control contains monitoring mechanisms, and actions are taken to correct deficiencies identified. Management believes that internal control over financial reporting supports the integrity and reliability of the external financial statements. There are inherent limitations in the effectiveness of any internal control, including the possibility of human error and the circumvention or overriding of controls. Accordingly, even effective internal controls can provide only reasonable assurance with respect to financial statement preparation. Further, because of changes in conditions, the effectiveness of internal controls may vary over time. IDA assessed its internal control over financial reporting for financial statement presentation in conformity with accounting principles generally accepted in the United States of America as of June 30, 2021. This assessment was based on the criteria for effective internal control over financial reporting described in the Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based upon this assessment, management believes that IDA maintained effective internal control over financial reporting presented in conformity with accounting principles generally accepted in the United States of America as of June 30, 2021. The independent audit firm that audited the financial statements has issued an Independent Auditors Report which expresses an opinion on IDA’s internal control over financial reporting. 54 IDA FINANCIAL STATEMENTS: JUNE 30, 2021 The Executive Directors of IDA have appointed an Audit Committee responsible for monitoring the accounting practices and internal controls of IDA. The Audit Committee is comprised entirely of Executive Directors who are independent of IDA’s management. The Audit Committee is responsible for recommending to the Executive Directors the selection of independent auditors. It meets periodically with management, the independent auditors, and the internal auditors to ensure that they are carrying out their responsibilities. The Audit Committee is responsible for performing an oversight role by reviewing and monitoring the financial, accounting and auditing procedures of IDA in addition to reviewing IDA’s financial reports. The independent auditors and the internal auditors have full and free access to the Audit Committee, with or without the presence of management, to discuss the adequacy of internal control over financial reporting and any other matters which they believe should be brought to the attention of the Audit Committee. ________________________ David Malpass President _______________________ Anshula Kant Managing Director and World Bank Group Chief Financial Officer ________________________ Jorge Familiar Calderon Vice President and World Bank Group Controller IDA FINANCIAL STATEMENTS: JUNE 30, 2021 55 INDEPENDENT AUDITORS’ REPORT ON MANAGEMENT’S ASSERTION REGARDING EFFECTIVENESS OF INTERNAL CONTROL OVER FINANCIAL REPORTING Deloitte & Touche LLP 7900 Tysons One Place Suite 800 McLean, VA 22102 USA Tel: +1 703 251 1000 Fax: +1 703 251 3400 www.deloitte.com INDEPENDENT AUDITORS' REPORT President and Board of Executive Directors International Development Association: We have audited the internal control over financial reporting of the International Development Association ("IDA") as of June 30, 2021, based on the criteria established in the Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Management’s Responsibility for Internal Control over Financial Reporting Management is responsible for designing, implementing, and maintaining effective internal control over financial reporting, and for its assessment about the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report Regarding Effectiveness of Internal Control Over Financial Reporting. Auditors’ Responsibility Our responsibility is to express an opinion on IDA's internal control over financial reporting based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. An audit internal control over financial reporting involves performing procedures to obtain audit evidence about whether a material weakness exists. The procedures selected depend on the auditor's judgment, including the assessment of the risks that a material weakness exists. An audit also includes obtaining an understanding of internal control over financial reporting and testing and evaluating the design and operating effectiveness of internal control over financial reporting based on the assessed risk. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Definition and Inherent Limitations of Internal Control over Financial Reporting An entity’s internal control over financial reporting is a process effected by those charged with governance, management, and other personnel, designed to provide reasonable assurance regarding the preparation of reliable financial statements in accordance with accounting principles generally accepted in the United States of America. An entity’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the entity; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures of the entity are being made only in accordance with authorizations of management and those charged with governance; and (3) provide reasonable assurance regarding prevention, or timely detection and correction, of unauthorized acquisition, use, or disposition of the entity's assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent, or detect and correct, misstatements. Also, projections of any assessment of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. 56 Opinion In our opinion, IDA maintained, in all material respects, effective internal control over financial reporting as of June 30, 2021, based on the criteria established in the Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Report on Financial Statements We have also audited, in accordance with auditing standards generally accepted in the United States of America, the financial statements as of and for the year ended June 30, 2021 of IDA, and our report dated August 6, 2021 expressed an unmodified opinion on those financial statements. August 6, 2021 57 INDEPENDENT AUDITORS’ REPORT Deloitte & Touche LLP 7900 Tysons One Place Suite 800 McLean, VA 22102 USA Tel.: +1 703 251 1000 Fax: +1 703 251 3400 www.deloitte.com INDEPENDENT AUDITORS’ REPORT President and Board of Executive Directors International Development Association: We have audited the accompanying financial statements of the International Development Association ("IDA"), which comprise the balance sheets as of June 30, 2021 and 2020, and the related statements of income, comprehensive income, changes in accumulated deficit, and cash flows for each of the three years in the period ended June 30, 2021, and the related notes to the financial statements. Management's Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditors' Responsibility Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to IDA’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of IDA as of June 30, 2021 and 2020, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 2021 in accordance with accounting principles generally accepted in the United States of America. 58 Change in Accounting Principle As described in Note A to the financial statements, IDA changed its method of accounting for the accumulated provision for loan losses and other exposures on July 1, 2020, due to the adoption of Accounting Standards Update No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. Report on Supplementary Information Our audits were conducted for the purpose of forming an opinion on the financial statements as a whole. The summary statement of loans and the statement of voting power and subscriptions and contributions as of June 30, 2021 ("supplementary information") listed in the table of contents are presented for the purpose of additional analysis and are not a required part of the financial statements. This supplementary information is the responsibility of IDA's management and was derived from and relates directly to the underlying accounting and other records used to prepare the financial statements. Such information has been subjected to the auditing procedures applied in our audits of the financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the financial statements or to the financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, such information is fairly stated in all material respects in relation to the financial statements as a whole. Report on Internal Control over Financial Reporting We have also audited, in accordance with auditing standards generally accepted in the United States of America, IDA's internal control over financial reporting as of June 30, 2021, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated August 6, 2021 expressed an unmodified opinion on IDA's internal control over financial reporting. August 6, 2021 59 BALANCE SHEET June 30, 2021 and June 30, 2020 Expressed in millions of U.S. dollars 2021 2020 Assets Due from banks—Notes C and K Unrestricted cash $ 470 $ 650 Restricted cash 26 24 496 674 Investments (including securities transferred under repurchase or securities lending agreements of Nil - June 30, 2021; $108 million - June 30, 2020) —Notes C, G and K 37,376 34,670 Derivative assets, net—Notes C, F and K 249 136 Receivable from affiliated organization—Note G 865 858 Other receivables Receivable from investment securities traded—Note C 7 636 Accrued interest and commitment charges 511 440 518 1,076 Loans outstanding (Summary statement of loans, Notes D, G and K) Total loans approved 251,676 227,291 Less: Undisbursed balance (including signed loan commitments of $60,775 million—June 30, 2021; $49,580 million— June 30, 2020) (70,172) (61,911) Loans outstanding 181,504 165,380 Less: Accumulated provision for loan losses (3,718) (4,420) Add: Deferred loans origination costs (7) 1 Net loans outstanding 177,779 160,961 Other assets—Note H 2,041 1,097 Total assets $ 219,324 $ 199,472 60 IDA FINANCIAL STATEMENTS: JUNE 30, 2021 2021 2020 Liabilities Borrowings—Notes E and K Market borrowings (at fair value) $ 20,555 $ 12,131 Concessional partner loans (at amortized cost) 7,759 7,635 28,314 19,766 Securities sold under repurchase agreements, securities lent under securities lending agreements, and payable for cash collateral received—Note C and K - 108 Derivative liabilities, net—Notes C, F and K 408 590 Payable for development grants—Note I 6,820 9,141 Payable to affiliated organization—Note G 561 509 Other liabilities Payable for investment securities purchased—Note C 73 101 Accounts payable and miscellaneous liabilities —Notes D and H 2,272 1,086 2,345 1,187 Total liabilities 38,448 31,301 Equity Members' subscriptions and contributions (Statement of voting power and subscriptions and contributions and Note B) Unrestricted 292,210 267,207 Restricted 324 322 Subscriptions and contributions committed 292,534 267,529 Less: Subscriptions and contributions receivable (38,240) (22,415) Cumulative discounts/ acceleration credits on subscriptions and contributions (3,842) (3,771) Subscriptions and contributions paid-in 250,452 241,343 Nonnegotiable, noninterest-bearing demand obligations on account of members' subscriptions and contributions Unrestricted (11,382) (10,630) Restricted (50) (49) (11,432) (10,679) Deferred amounts to maintain value of currency holdings (244) (245) Accumulated deficit (Statement of changes in accumulated deficit) (59,556) (58,321) Accumulated other comprehensive income (loss)—Note J 1,656 (3,927) Total equity 180,876 168,171 Total liabilities and equity $ 219,324 $ 199,472 The Notes to Financial Statements are an integral part of these Statements. IDA FINANCIAL STATEMENTS: JUNE 30, 2021 61 STATEMENT OF INCOME For the fiscal years ended June 30, 2021, June 30, 2020 and June 30, 2019 Expressed in millions of U.S. dollars 2021 2020 2019 Interest revenue Loans, net—Note D $ 2,050 $ 1,684 $ 1,462 Investments, net—Notes C, F, G and K 147 422 466 Asset/liability management derivatives, net (14) (22) (8) Borrowing expenses, net—Note E (187) (241) (218) Interest revenue, net of borrowing expenses 1,996 1,843 1,702 Provision for losses on loans and other exposures, release (charge)—Note D 539 170 (316) Non-interest revenue Revenue from externally funded activities—Notes G and H 814 902 783 Commitment charges—Note D 19 15 13 Other 17 15 12 Total 850 932 808 Non-interest expenses Administrative—Notes G and H (2,406) (2,389) (2,241) Contributions to special programs—Note G (20) (21) (21) Other 20 (40) 12 Total (2,406) (2,450) (2,250) Transfers from affiliated organizations and others—Notes G and H 544 252 258 Development grants—Note I (2,830) (1,475) (7,694) Non-functional currency translation adjustment (losses) gains, net (372) 95 105 Unrealized mark-to-market gains on Investments-Trading portfolio, net—Notes F and K 144 207 351 Unrealized mark-to-market gains (losses) on Non-Trading portfolios, net Asset-liability management—Notes F and K 1,080 (699) 359 Investments—Note K (12) 29 32 Other 34 (18) (5) Total 1,102 (688) 386 Net loss $ (433) $ (1,114) $ (6,650) The Notes to Financial Statements are an integral part of these Statements. 62 IDA FINANCIAL STATEMENTS: JUNE 30, 2021 STATEMENT OF COMPREHENSIVE INCOME For the fiscal years ended June 30, 2021, June 30, 2020 and June 30, 2019 Expressed in millions of U.S. dollars 2021 2020 2019 Net loss $ (433) $ (1,114) $ (6,650) Other Comprehensive income (loss)—Note J Currency translation adjustments on functional currencies 5,647 (1,526) (1,735) Net Change in Debit Valuation Adjustment (DVA) on Fair Value option elected liabilities (64) 7 2 Comprehensive income (loss) $ 5,150 $ (2,633) $ (8,383) STATEMENT OF CHANGES IN ACCUMULATED DEFICIT For the fiscal years ended June 30, 2021, June 30, 2020 and June 30, 2019 Expressed in millions of U.S. dollars 2021 2020 2019 Accumulated Deficit at beginning of the fiscal year $ (58,321) $ (57,207) $ (50,557) Cumulative effect of a change in accounting principle—Notes A and D (802) - - Adjusted Accumulated Deficit at beginning of the fiscal year $ (59,123) $ (57,207) $ (50,557) Net loss (433) (1,114) (6,650) Accumulated Deficit at end of the fiscal year $ (59,556) $ (58,321) $ (57,207) The Notes to Financial Statements are an integral part of these Statements. IDA FINANCIAL STATEMENTS: JUNE 30, 2021 63 STATEMENT OF CASH FLOWS For the fiscal years ended June 30, 2021, June 30, 2020 and June 30, 2019 Expressed in millions of U.S. dollars 2021 2020 2019 Cash flows from investing activities Loans Disbursements $ (16,681) $ (16,449) $ (13,562) Principal repayments 6,457 6,016 5,277 Principal prepayments - 51 51 Non-trading securities—Investments Repayments 125 124 122 Net cash used in investing activities (10,099) (10,258) (8,112) Cash flows from financing activities Members' subscriptions and contributions 8,355 7,823 7,421 Medium and long-term borrowings New issues 9,405 5,725 872 Retirements (96) (43) - Short-term borrowings (original maturities greater than 90 days) New issues 8,219 12,018 1,724 Retirements (9,561) (8,178) - Net short-term borrowings (original maturities less than 90 days) 120 16 140 Net derivatives-borrowings 29 (20) (2) Net cash provided by financing activities 16,471 17,341 10,155 Cash flows from operating activities Net loss (433) (1,114) (6,650) Adjustments to reconcile net loss to net cash used in operating activities Provision for losses on loans and other exposures (release) charge (539) (170) 316 Non-functional currency translation adjustment losses (gains), net 372 (95) (105) Unrealized mark-to-market (gains) losses on non-trading portfolios, net (1,102) 688 (386) Other non-interest (income) expenses, net (20) 40 (12) Amortization of discount on borrowings 96 133 88 Changes in: Investments—Trading (2,090) (2,323) 2,956 Net investment securities traded/purchased 603 (155) (643) Net derivatives—Investments 160 (89) (14) Net derivatives—Asset-liability management 19 533 127 Net securities purchased/sold under resale/repurchase agreements and payable for cash collateral received (109) (601) (1,811) Net receivable from affiliated organizations 45 14 (26) Payable for development grants (2,652) (3,070) 3,697 Accrued interest and commitment charges (57) (43) (13) Other assets (1,367) (1,279) 379 Accounts payable and miscellaneous liabilities 471 992 (332) Net cash used in operating activities (6,603) (6,539) (2,429) Effect of exchange rate changes on unrestricted and restricted cash 53 (8) 1 Net (decrease) increase in unrestricted and restricted cash (178) 536 (385) Unrestricted cash and restricted cash at beginning of the fiscal year 674 138 523 Unrestricted and restricted cash at end of the fiscal year $ 496 $ 674 $ 138 64 IDA FINANCIAL STATEMENTS: JUNE 30, 2021 STATEMENT OF CASH FLOWS For the fiscal years ended June 30, 2021, June 30, 2020 and June 30, 2019 Expressed in millions of U.S. dollars 2021 2020 2019 Supplemental disclosure Increase (Decrease) in ending balances resulting from exchange rate fluctuations: Loans outstanding $ 5,909 $ (1,543) $ (1,696) Investment portfolio 1,180 (449) (334) Derivatives—Asset-liability management (880) 321 293 Borrowings 627 (149) 12 Principal repayments written off under Heavily Indebted Poor Countries (HIPC) Debt Initiative 9 10 10 Loans prepaid—carrying value - 54 54 Interest paid on borrowing portfolio 118 161 88 The Notes to Financial Statements are an integral part of these Statements. IDA FINANCIAL STATEMENTS: JUNE 30, 2021 65 SUMMARY STATEMENT OF LOANS June 30, 2021 Amounts expressed in millions of U.S. dollars Undisbursed balance Loans Percentage of Signed loan Loans Borrower or guarantor Total loans approved but total loans commitments outstanding not yet signed outstanding a Afghanistan $ 337 $ - $ - $ 337 $ 0.19 % Albania 541 - - 541 0.30 Angola 506 - 5 501 0.28 Armenia 964 - 10 954 0.53 Azerbaijan 281 - - 281 0.15 Bangladesh 26,277 1,132 7,101 18,044 9.94 Benin 2,212 27 863 1,322 0.73 Bhutan 366 - 2 364 0.20 Bolivia 1,030 - 246 784 0.43 Bosnia and Herzegovina 949 - 1 948 0.52 Botswana * - - * * Burkina Faso 3,361 221 1,012 2,128 1.17 Burundi 137 - - 137 0.07 Cabo Verde, Republic of 536 20 60 456 0.25 Cambodia 1,592 197 693 702 0.39 Cameroon 3,242 826 708 1,708 0.94 Central African Republic 139 - 4 135 0.07 Chad 175 - - 175 0.10 China 649 - - 649 0.36 Comoros 129 - 109 20 0.01 Congo, Democratic Republic of 3,540 287 1,527 1,726 0.95 Congo, Republic of 520 63 170 287 0.16 Côte d'Ivoire 4,844 268 2,278 2,298 1.27 Djibouti 346 - 138 208 0.11 Dominica 179 - 98 81 0.05 Dominican Republic 1 - - 1 * Ecuador * - - * * Egypt, Arab Republic of 344 - - 344 0.19 El Salvador 2 - - 2 * Equatorial Guinea 19 - - 19 0.01 Eritrea 446 - - 446 0.25 Eswatini 1 - - 1 * Ethiopia 15,320 - 4,130 11,190 6.16 Fiji 234 - 54 180 0.10 Gambia, The 159 - 27 132 0.07 Georgia 893 - 10 883 0.49 Ghana 6,581 300 1,602 4,679 2.58 Grenada 246 - 66 180 0.10 Guinea 906 14 261 631 0.35 Guinea-Bissau 298 - 127 171 0.09 Guyana 169 5 71 93 0.05 Honduras 1,642 190 441 1,011 0.56 India 23,133 112 1,026 21,995 12.12 Indonesia 757 - - 757 0.42 Iraq 284 - - 284 0.16 Jordan 207 - 75 132 0.07 Kenya 13,096 127 2,968 10,001 5.51 Kosovo 330 18 145 167 0.09 Kyrgyz Republic 994 9 320 665 0.37 Lao People's Democratic Republic 1,162 - 434 728 0.40 Lebanon 102 - 10 92 0.05 Lesotho 672 22 234 416 0.23 66 IDA FINANCIAL STATEMENTS: JUNE 30, 2021 SUMMARY STATEMENT OF LOANS June 30, 2021 Amounts expressed in millions of U.S. dollars Undisbursed balance Loans approved Percentage Signed loan Loans Borrower or guarantor Total loans but not yet total of loans commitments outstanding signed outstanding a Liberia $ 920 $ - $ 340 $ 580 0.32 % Madagascar 3,095 348 747 2,000 1.10 Malawi 2,021 125 735 1,161 0.64 Maldives 131 - 27 104 0.06 Mali 2,771 107 493 2,171 1.20 Mauritania 433 - 15 418 0.23 Mauritius 1 - - 1 * Moldova 994 29 253 712 0.39 Mongolia 965 - 214 751 0.41 Montenegro 25 - - 25 0.01 Morocco 1 - - 1 * Mozambique 3,429 149 61 3,219 1.77 Myanmar 3,329 - 1,540 1,789 0.98 Nepal 5,526 60 1,538 3,928 2.16 Nicaragua 1,006 - 188 818 0.45 Niger 3,028 156 1,139 1,733 0.95 Nigeria 19,538 1,462 6,605 11,471 6.32 North Macedonia 194 - - 194 0.11 Pakistan 21,698 - 5,566 16,132 8.89 Papua New Guinea 851 129 255 467 0.26 Paraguay 3 - - 3 * Philippines 24 - - 24 0.01 Rwanda 3,301 - 731 2,570 1.42 Samoa 112 - - 112 0.06 São Tomé and Príncipe 11 - - 11 0.01 Senegal 4,973 - 1,746 3,227 1.78 Serbia 158 - - 158 0.09 Sierra Leone 534 - 79 455 0.25 Solomon Islands 119 - 71 48 0.03 Somalia 130 - - 130 0.07 South Sudan 81 - - 81 0.04 Sri Lanka 3,979 - 741 3,238 1.78 St. Kitts and Nevis * - - * * St. Lucia 271 - 136 135 0.07 St. Vincent and the Grenadines 255 50 58 147 0.08 Sudan 371 - - 371 0.20 Syrian Arab Republic 14 - - 14 0.01 Tajikistan 553 - 199 354 0.19 Tanzania 12,033 1,143 2,599 8,291 4.57 Timor-Leste 162 - 128 34 0.02 Togo 516 16 219 281 0.16 Tonga 50 - 5 45 0.03 Tunisia 1 - - 1 * Turkey 2 - - 2 * Uganda 6,227 298 1,545 4,384 2.41 Uzbekistan 3,983 540 1,505 1,938 1.07 Vanuatu 141 - 46 95 0.05 Vietnam 17,467 642 2,746 14,079 7.76 Yemen, Republic of 1,462 - 28 1,434 0.79 Zambia 2,296 139 812 1,345 0.74 Zimbabwe 472 - - 472 0.26 Subtotal—Members a $ 250,507 $ 9,231 $ 60,136 $ 181,140 99.79 % IDA FINANCIAL STATEMENTS: JUNE 30, 2021 67 SUMMARY STATEMENT OF LOANS June 30, 2021 Amounts expressed in millions of U.S. dollars Undisbursed balance Loans approved Percentage of Signed loan Loans Borrower or guarantor Total loans but not yet total loans commitments outstanding signed outstanding a African Trade Insurance Agency $ 423 $ - $ 388 $ 35 0.02 % Bank of the States of Central Africa 60 - 18 42 0.02 Caribbean Development Bank 10 - - 10 0.01 West African Development Bank 389 - 122 267 0.15 Subtotal—Regional development banks $ 882 $ - $ 528 $ 354 0.20 % Private Sector Window (PSW) Loans 287 166 111 10 0.01 Total—June 30, 2021 a $ 251,676 $ 9,397 $ 60,775 $ 181,504 100.00 % Total—June 30, 2020 $ 227,291 $ 12,331 $ 49,580 $ 165,380 * Indicates amount less than $0.5 million or 0.005 percent a. May differ from the calculated amounts or sum of individual figures shown due to rounding. The Notes to Financial Statements are an integral part of these Statements. 68 IDA FINANCIAL STATEMENTS: JUNE 30, 2021 STATEMENT OF VOTING POWER AND SUBSCRIPTIONS AND CONTRIBUTIONS June 30, 2021 Amounts expressed in millions of U.S. dollars Subscriptions and Number of Percentage of total contributions Member a votes votes committed b Part I Members Australia 365,955 1.25 % $ 5,531.34 Austria 272,150 0.93 4,183.42 Belgium 320,639 1.09 5,453.06 Canada 782,320 2.66 13,483.05 Denmark 275,568 0.94 4,339.45 Estonia 54,427 0.19 21.85 Finland 185,339 0.63 2,271.86 France 1,118,918 3.81 20,625.63 Germany 1,569,980 5.35 29,272.77 Greece 57,465 0.20 214.16 Iceland 65,779 0.22 103.96 Ireland 110,230 0.38 938.89 Italy 667,995 2.28 11,349.98 Japan 2,454,693 8.36 50,118.26 Kuwait 122,208 0.42 1,121.38 Latvia 60,916 0.21 20.73 Lithuania 54,278 0.18 19.83 Luxembourg 83,584 0.28 471.47 Netherlands 590,188 2.01 10,731.10 New Zealand 81,955 0.28 421.18 Norway 308,671 1.05 4,686.94 Portugal 74,308 0.25 332.75 Russian Federation 90,647 0.31 750.72 Slovenia 60,445 0.21 46.49 South Africa 76,902 0.26 249.43 Spain 315,111 1.07 5,006.44 Sweden 608,339 2.07 10,095.48 Switzerland 389,326 1.33 6,575.63 United Arab Emirates 1,367 - 5.58 United Kingdom 1,984,072 6.76 36,991.70 United States 2,925,790 9.96 56,214.92 Subtotal—Part I Members b 16,129,565 54.94 % $ 281,649.45 Part II Members Afghanistan 59,204 0.20 1.50 Albania 61,859 0.21 0.37 Algeria 122,959 0.42 30.57 Angola 153,438 0.52 8.27 Argentina 412,256 1.40 156.21 Armenia 65,146 0.22 0.69 Azerbaijan 72,636 0.25 6.14 Bahamas, The 59,906 0.20 8.54 Bangladesh 156,110 0.53 8.16 Barbados 62,860 0.21 2.36 Belize 19,834 0.07 0.27 Benin 60,820 0.21 0.78 Bhutan 58,732 0.20 0.08 Bolivia, Plurinational State of 75,994 0.26 1.65 Bosnia and Herzegovina 55,440 0.19 2.50 IDA FINANCIAL STATEMENTS: JUNE 30, 2021 69 STATEMENT OF VOTING POWER AND SUBSCRIPTIONS AND CONTRIBUTIONS June 30, 2021 Amounts expressed in millions of U.S. dollars Subscriptions and Number of Percentage of total contributions Member a votes votes committed b Botswana 53,728 0.18 % $ 3.63 Brazil 477,996 1.63 834.89 Burkina Faso 66,310 0.23 0.81 Burundi 55,801 0.19 1.09 Cabo Verde, Republic of 43,840 0.15 0.13 Cambodia 71,089 0.24 1.60 Cameroon 60,782 0.21 1.61 Central African Republic 48,910 0.17 0.77 Chad 52,210 0.18 0.78 Chile 58,505 0.20 39.12 China 660,966 2.25 1,135.53 Colombia 133,321 0.45 25.21 Comoros 47,140 0.16 0.13 Congo, Democratic Republic of 82,699 0.28 4.60 Congo, Republic of 52,210 0.18 0.75 Costa Rica 28,362 0.10 0.28 Côte d’Ivoire 67,377 0.23 1.57 Croatia 91,994 0.31 5.98 Cyprus 75,021 0.26 32.18 Czech Republic 131,906 0.45 157.38 Djibouti 48,116 0.16 0.26 Dominica 58,892 0.20 0.14 Dominican Republic 27,780 0.09 0.58 Ecuador 50,151 0.17 0.94 Egypt, Arab Republic of 134,452 0.46 18.66 El Salvador 46,516 0.16 0.49 Equatorial Guinea 6,167 0.02 0.41 Eritrea 46,536 0.16 0.14 Eswatini 22,322 0.08 0.42 Ethiopia 51,732 0.18 0.69 Fiji 19,809 0.07 0.76 Gabon 2,093 0.01 0.63 Gambia, The 55,208 0.19 0.42 Georgia 65,717 0.22 0.97 Ghana 86,677 0.30 3.14 Grenada 28,927 0.10 0.14 Guatemala 40,696 0.14 0.56 Guinea 37,287 0.13 1.33 Guinea-Bissau 44,500 0.15 0.22 Guyana 74,343 0.25 1.27 Haiti 54,538 0.19 1.11 Honduras 59,206 0.20 0.44 Hungary 205,105 0.70 173.10 India 851,128 2.90 628.42 Indonesia 259,846 0.88 140.09 Iran, Islamic Republic of 115,867 0.39 24.18 Iraq 72,712 0.25 1.11 Israel 90,204 0.31 152.76 Jordan 24,865 0.08 0.41 Kazakhstan 23,297 0.08 8.50 70 IDA FINANCIAL STATEMENTS: JUNE 30, 2021 STATEMENT OF VOTING POWER AND SUBSCRIPTIONS AND CONTRIBUTIONS June 30, 2021 Amounts expressed in millions of U.S. dollars Subscriptions and Number of Percentage of contributions Member a votes total votes committed b Kenya 77,960 0.27 % $ 2.41 Kiribati 43,592 0.15 0.10 Korea, Republic of 297,756 1.01 2,817.34 Kosovo, Republic of 50,857 0.17 0.86 Kyrgyz Republic 64,522 0.22 0.57 Lao People's Democratic Republic 48,910 0.17 0.73 Lebanon 8,562 0.03 0.56 Lesotho 57,005 0.19 0.23 Liberia 52,038 0.18 1.12 Libya 44,771 0.15 1.31 Madagascar 70,516 0.24 1.39 Malawi 58,540 0.20 0.99 Malaysia 104,565 0.36 59.81 Maldives 55,046 0.19 0.05 Mali 62,445 0.21 1.37 Marshall Islands 4,902 0.02 0.01 Mauritania 52,210 0.18 0.78 Mauritius 75,236 0.26 1.32 Mexico 142,236 0.48 168.34 Micronesia, Federated States of 18,424 0.06 0.03 Moldova 56,582 0.19 0.88 Mongolia 45,818 0.16 0.30 Montenegro 59,594 0.20 0.76 Morocco 111,332 0.38 5.70 Mozambique 63,917 0.22 2.06 Myanmar 82,096 0.28 2.57 Nepal 54,710 0.19 0.72 Nicaragua 62,982 0.21 0.44 Niger 52,210 0.18 0.76 Nigeria 119,982 0.41 40.49 North Macedonia 47,095 0.16 1.10 Oman 59,288 0.20 1.42 Pakistan 244,070 0.83 78.42 Palau 3,804 0.01 0.03 Panama 10,185 0.03 0.03 Papua New Guinea 67,754 0.23 1.27 Paraguay 46,493 0.16 0.44 Peru 93,132 0.32 18.07 Philippines 149,770 0.51 34.43 Poland 587,836 2.00 149.36 Romania 96,010 0.33 5.20 Rwanda 52,038 0.18 1.12 Samoa 43,901 0.15 0.14 São Tomé and Principe 49,519 0.17 0.12 Saudi Arabia 980,019 3.34 3,205.70 Senegal 74,743 0.25 2.69 Serbia 86,096 0.29 7.11 St. Kitts and Nevis 13,868 0.05 0.17 St. Lucia 30,532 0.10 0.23 St. Vincent and the Grenadines 49,929 0.17 0.12 IDA FINANCIAL STATEMENTS: JUNE 30, 2021 71 STATEMENT OF VOTING POWER AND SUBSCRIPTIONS AND CONTRIBUTIONS June 30, 2021 Amounts expressed in millions of U.S. dollars Subscriptions and Percentage of contributions Member a Number of votes total votes committed b Sierra Leone 63,638 0.22 % $ 1.04 Singapore 56,746 0.19 317.81 Slovak Republic 94,704 0.32 37.56 Solomon Islands 43,901 0.15 0.13 Somalia 10,506 0.04 0.95 South Sudan 52,447 0.18 0.45 Sri Lanka 106,639 0.36 4.34 Sudan 65,003 0.22 1.50 Syrian Arab Republic 14,131 0.05 1.19 Tajikistan 53,918 0.18 0.53 Tanzania 68,943 0.23 2.32 Thailand 113,639 0.39 19.18 Timor-Leste 45,123 0.15 0.44 Togo 61,840 0.21 1.19 Tonga 49,514 0.17 0.11 Trinidad and Tobago 81,067 0.28 2.13 Tunisia 2,793 0.01 1.89 Turkey 177,195 0.60 204.79 Tuvalu 8,838 0.03 0.03 Uganda 50,392 0.17 2.32 Ukraine 115,569 0.39 8.05 Uzbekistan 73,936 0.25 1.92 Vanuatu 50,952 0.17 0.31 Vietnam 61,168 0.21 2.23 Yemen, Republic of 68,976 0.23 2.20 Zambia 87,027 0.30 3.63 Zimbabwe 105,982 0.36 6.41 Subtotal—Part II Members b 13,232,035 45.06 % $ 10,884 Total—June 30, 2021 b 29,361,600 100.00 % $ 292,534 Total—June 30, 2020 28,824,451 $ 267,529 a. See Notes to Financial Statements—Note A for an explanation of the two categories of membership b. May differ from the calculated amounts or sum of individual figures shown due to rounding. The Notes to Financial Statements are an integral part of these Statements. 72 IDA FINANCIAL STATEMENTS: JUNE 30, 2021 NOTES TO FINANCIAL STATEMENTS PURPOSE AND AFFILIATED ORGANIZATIONS The International Development Association (IDA) is an international organization established in 1960. IDA’s main goal is reducing poverty through promoting sustainable economic development in the less developed countries of the world that are members of IDA, by extending concessionary and non-concessionary financing in the form of grants, loans and guarantees, and by providing related technical assistance. The activities of IDA are complemented by those of three affiliated organizations, the International Bank for Reconstruction and Development (IBRD), the International Finance Corporation (IFC), and the Multilateral Investment Guarantee Agency (MIGA). Each of these organizations is legally and financially independent from IDA, with separate assets and liabilities, and IDA is not liable for their respective obligations. Transactions with these affiliates are disclosed in the notes that follow. IDA is immune from taxation pursuant to Article VIII, Section 9, Immunities from Taxation, of IDA’s Articles of Agreement. NOTE A—SUMMARY OF SIGNIFICANT ACCOUNTING AND RELATED POLICIES IDA’s financial statements are prepared in conformity with accounting principles generally accepted in the United States of America (U.S. GAAP). The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Due to the inherent uncertainty involved in making those estimates, actual results could differ from these estimates. Significant judgment has been used in the valuation of certain financial instruments and the determination of the adequacy of the accumulated provisions for debt relief and losses on loans and other exposures (signed loan commitments, including deferred drawdown options that are effective and irrevocable commitments, guarantees and repaying project preparation facilities). On August 6, 2021, the Executive Directors approved these financial statements for issue, which was also the date through which IDA’s management evaluated subsequent events. Certain reclassifications to the prior year’s information have been made to conform with the current year’s presentation. Translation of Currencies IDA’s financial statements are expressed in U.S. dollars for the purpose of summarizing its financial position and the results of its operations for the convenience of its members and other users. IDA conducts its operations in Special Drawing Rights (SDR) and its component currencies of U.S. dollar, euro, Japanese yen, pound sterling and Chinese renminbi. These constitute the functional currencies of IDA. Assets and liabilities are translated at market exchange rates in effect at the end of the accounting period. Revenue and expenses are translated at either the market exchange rates in effect on the dates of revenue and expense recognition, or at an average of the market exchange rates in effect during each month. Translation adjustments relating to the revaluation of all assets and liabilities denominated in either SDR or the component currencies of SDR, are reflected in Accumulated Other Comprehensive Income. Translation adjustments relating to non- functional currencies are reported in the Statement of Income. Members’ Subscriptions and Contributions Recognition Members’ subscriptions and contributions committed for each IDA replenishment are i nitially recorded both as subscriptions and contributions committed and, correspondingly, as subscriptions and contributions receivable. Prior to effectiveness, only a portion of the value of Instruments of Commitment (IoCs) received as specified in the replenishment resolution is recorded as subscriptions and contributions committed. Upon effectiveness, the remainder of the value of IoCs received is subsequently recorded as subscriptions and contributions committed. IDA FINANCIAL STATEMENTS: JUNE 30, 2021 73 IoCs can contain unqualified or qualified commitments. Under an unqualified commitment, a contributing member agrees to pay a specified amount of its subscription and contribution without requiring appropriation legislation. A qualified commitment is subject to the contributing member obtaining the necessary appropriation legislation. Subscriptions and contributions made under IoCs become available for commitment for loans, grants and guarantees by IDA for a particular replenishment in accordance with the IDA replenishment envelope as approved by the Executive Directors. A replenishment becomes effective when IDA receives IoCs from members whose subscriptions and contributions aggregate to a specified portion of the full replenishment. Amounts not yet paid in at the date of effectiveness, are recorded as subscriptions and contributions receivable and shown as a reduction of subscriptions and contributions committed. These receivables become due throughout the replenishment period, generally three years, in accordance with an agreed payment schedule. The actual payment of receivables when they become due may be subject to the budgetary appropriation processes for certain members. The subscriptions and contributions receivable are settled through payment of cash or deposit of nonnegotiable, non- interest bearing demand notes. The notes are encashed by IDA on an approximately pro rata basis either as provided in the relevant replenishment resolution over the disbursement period of the loans and grants committed under the replenishment, or as needed. In certain replenishments, donors receive discounts (a reduced obligation) when they pay a contribution amount before the relevant due date, and acceleration credits when they pay their full contribution amount before the due date. IDA retains any related revenue earned on these early payments, with subscriptions and contributions committed being recorded at contribution amounts received, grossed up for discounts and acceleration credits. The discounts and acceleration credits are deducted in arriving at the subscriptions and contributions paid-in. Under the Seventeenth Replenishment of IDA’s Resources (IDA17), which became effective beginning fiscal year ended June 30, 2015, IDA’s Executive Directors approved the use of a limited amount of concessional debt fun ding, referred to as concessional partner loans, which continued in the subsequent Replenishments of IDA’s Resources. The borrowing terms of this concessional debt funding aim to match the concessional features of IDA’s loans. Proceeds received under this arrangement have two separate components: (1) a borrowing component and (2) a grant component, for which voting rights are allocated to providers of the concessional partner loans. The borrowing component of the concessional partner loans is recognized and reported at amortized cost (see borrowings section for more details). The grant component is calculated as a function of the terms of the loan and the discount rate agreed upon during the replenishment discussions. This grant component is recorded as equity equivalent to the cash received. For the purposes of determining its subscriptions and contributions, the membership of IDA is divided into two categories: (1) Part I members, which make payments of subscriptions and contributions provided to IDA in convertible currencies that may be freely used or exchanged by IDA in its operations and (2) Part II members, which make payments of ten percent of their initial subscriptions in freely convertible currencies, and the remaining 90 percent of their initial subscriptions, and all additional subscriptions and contributions in their own currencies or in freely convertible currencies. Certain Part II members provide a portion of their subscriptions and contributions in the same manner as mentioned in (1) above. IDA’s Articles of Agreement and subsequent replenishment resolutions provide that the currency of any Part II member paid in by it may not be used by IDA for projects financed by IDA and located outside the territory of the member except by agreement between the member and IDA. The national currency portion of subscriptions of Part II members is recorded as restricted under Members’ subs criptions and contributions unless released under an agreement between the member and IDA, or used for administrative expenses. The cash paid and notes deposited in nonconvertible local currencies for the subscriptions of Part II members are recorded either as Restricted cash under Due from Banks, or as restricted notes included under Nonnegotiable, Noninterest-bearing Demand Obligations on Account of Members’ subscriptions and contributions. Following adoption by the Board of Governors on April 21, 2006 of a resolution authorizing additions to IDA’s resources to finance the MDRI (Multilateral Debt Relief Initiative), pledges received in the form of IoCs for financing the MDRI are recorded and accounted for in their entirety. Therefore, the full value of all IoCs received is recorded as Subscriptions and contributions committed. Correspondingly, the IoCs are recorded as Subscriptions and contributions receivable and deducted from equity. 74 IDA FINANCIAL STATEMENTS: JUNE 30, 2021 Withdrawal of Membership Under IDA’s Articles of Agreement, a member may withdraw from membership in IDA at any time. When a government ceases to be a member, it remains liable for all financial obligations undertaken by it to IDA, whether as a member, borrower, guarantor or otherwise. The Articles provide that upon withdrawal, IDA and the government shall proceed to a settlement of accounts. If agreement is not reached within six months, standard arrangements are provided. Under these arrangements, IDA would pay to the government the lower of the member’s total paid -in subscriptions and contributions or the member’s proportionate share of IDA’s net assets. These funds would be paid as a proportionate share of all principal repayments received by IDA on loans made during the period of the government’s membership. Valuation of Subscriptions and Contributions The subscriptions and contributions provided through the Third Replenishment are expressed in t erms of “U.S. dollars of the weight and fineness in effect on January 1, 1960” (1960 dollars). Following the aboliti on of gold as a common denominator of the monetary system and the repeal of the provision of the U.S. law defining the par value of the U.S. dollar in terms of gold, the pre-existing basis for translating 1960 dollars into current dollars or any other currency disappeared. The Executive Directors of IDA decided, that until such time as the relevant provisions of the Articles of Agreement are amended, the words “U.S. dollars of the weight and fineness in effect on January 1, 1960” in Article II, Section 2(b) of the Articles of Agreement of IDA are interpreted to mean the SDR introduced by the International Monetary Fund as the SDR was valued in terms of U.S. dollars immediately before the introduction of the basket method of valuing the SDR on July 1, 1974, such value being equal to $1.20635 for one SDR (the 1974 SDR). The Executive Directors also decided to apply the same standard of value to amounts expressed in 1960 dollars in the relevant resolutions of the Board of Governors. The subscriptions and contributions provided through the Third Replenishment are expressed on the basis of the 1974 SDR. Prior to the decision of the Executive Directors, IDA had valued these subscriptions and contributions on the basis of the SDR at the current market value of the SDR. The subscriptions and contributions provided under the Fourth Replenishment and thereafter are expressed in members’ currencies or SDRs and are payable in members’ currencies. Subscriptions and contributions made available for disbursement in cash to IDA are translated at market exchange rates in effect on the dates they were made available. Subscriptions and contributions not yet available for disbursements are translated at market exchange rates in effect at the end of the accounting period. Maintenance of Value Article IV, Section 2(a) and (b) of IDA’s Articles of Agreement provides for maintenance of value payments on account of the local currency portion of the initial subscription whenever the par value of the member’s currency or its foreign exchange value has depreciated or appreciated to a significant extent, so long as, and to the extent that, such currency shall not have been initially disbursed or exchanged for the currency of another member. The provisions of Article IV, Section 2(a) and (b) have by agreement been extended to cover additional subscriptions and contributions of IDA through the Third Replenishment, but are not applicable to those of the Fourth and subsequent replenishments. The Executive Directors decided on June 30, 1987 that settlements of maintenance of value, which would result from the resolution of the valuation issue on the basis of the 1974 SDR, would be deferred until the Executive Directors decide to resume such settlements. These amounts are shown as Deferred Amounts to Maintain Value of Currency Holdings and deducted from equity; any changes relate solely to translation adjustments. Nonnegotiable, Noninterest-bearing Demand Obligations on Account of Members’ Subscriptions and Contributions Payments on these instruments are due to IDA upon demand and these instruments are held in bank accounts in IDA’s name. These instruments are carried and reported at face value as a reduction to equity on the Balance Sheet. Loans and Other Exposures In fulfilling its mission, IDA makes concessional and non-concessional loans to the poorest countries. These loans and other exposures (collectively “exposures”) are made to, or guaranteed by, member governments or to the government of a territory of a member (except for loans which have been made to regional development institutions for the benefit of members or territories of members of IDA). In order to qualify for lending on IDA terms, a IDA FINANCIAL STATEMENTS: JUNE 30, 2021 75 country’s per capita income must be below a certain level ($1,185 for the fiscal year ended June 30, 2021 and $1,175 for the fiscal year ended June 30, 2020) and the country may have only limited or no access to IBRD lending. Loans are carried at amortized cost. Commitment charges on the undisbursed balance of loans, are recognized in revenue as earned. Incremental direct costs associated with originating loans are capitalized and amortized over the life of the loans. Accrued interest is presented on the Balance Sheet in the line item Other receivables, accrued interest and commitment charges. It is IDA’s practice not to reschedule service charges, interest or principal payments on its loans or participate in debt rescheduling agreements with respect to its loans. Should modifications be made to the terms of existing loans, IDA would performs an evaluation to determine the required accounting treatment, including whether the modifications would result in the affected loans being accounted for as a trouble debt restructuring, new loan, or as a continuation of the existing loans. It is the policy of IDA to place into nonaccrual status all loans and other exposures made to, or guaranteed by, a member or to the territory of a member if principal or charges with respect to any such loan and other exposures are overdue by more than six months, unless IDA’s management determines that the overdue amount will be collected in the immediate future. In addition, if loans by IBRD to a member government are placed into nonaccrual status, all loans and other exposures to that member will also be placed into nonaccrual status by IDA. On the date a member’s loans and other exposures are placed into nonaccrual status, unpaid charges that had been accrued on loans are deducted from loan revenue in the current period. Revenue on nonaccrual loans is included in the Statement of Income only to the extent that payments have been received by IDA. If collectability risk is considered to be particularly high at the time of arrears clearance, the member’s loans and other exposures may not automatically emerge from nonaccrual status, even though the member’s eligibility for new loans may have been restored. In such instances, a decision on the restoration of loans to accrual status is made on a case-by-case basis after a suitable period of payment or policy performance has passed from the time of arrears clearance. The repayment obligations of loans funded from resources through the Fifth Replenishment are expressed in the loan agreements in terms of 1960 dollars. In June 1987, the Executive Directors decided to value those loans at the rate of $1.20635 per 1960 dollar on a permanent basis. Loans funded from resources provided under the Sixth Replenishment and thereafter are denominated in SDRs, with the exception of loans provided under the Single Currency Lending program, which allows IDA recipients to denominate new IDA loans in one of the five constituent currencies of the SDR basket. Loan commitments: Undisbursed loans relate to operations approved by the Executive Directors for which disbursements are yet to be made. IDA records a provision for expected losses on undisbursed loan commitments including Deferred Drawdown Options (DDOs), when signed by both parties. The signature of the loan agreement is a binding event that prevents IDA from unconditionally withdrawing from the agreement. Buy-down of Loans IDA enters into loan buy-down agreements with third party donors who make payments on the borrower’s service and commitment charges through a trust fund until the borrower reaches agreed performance goals. The trust fund then buys down the related loans for an amount equivalent to the present value of the remaining cash flows of the related loans, ensuring IDA incurs no economic loss. The trust fund subsequently cancels the purchased loans, converting them to grant terms. Development Grants Effective July 1, 2019, with the adoption of ASU 2018-08 Not-For-Profit Entities (Topic 958) Clarifying the Scope and the Accounting Guidance for Contributions Received and Contributions Made, development grants made by IDA that are deemed to be conditional, are expensed when all the conditions have been met, which generally occurs at the time of disbursement. Development grants that are deemed to be unconditional, continue to be expensed upon approval. Prior to July 1, 2019, grants were recorded as an expense, and a liability was recognized, upon approval of the development grant by the Executive Directors. Commitment charges on the undisbursed balance of development grants are recognized in revenue as earned. 76 IDA FINANCIAL STATEMENTS: JUNE 30, 2021 Project Preparation Advances Project Preparation Advances (PPAs) are advances made to borrowers to finance project preparation costs pending the approval of follow-on development operations. If approved under grant terms, these amounts are expensed upon approval by management. To the extent there are follow-on loans or grants, these PPAs are refinanced out of the proceeds of the loans and grants. Accordingly, the PPA grant amounts initially charged to expense are reversed upon approval of the follow-on development grants or loans. Guarantees Financial guarantees are commitments issued by IDA to guarantee payment performance by a member country (the debtor) to a third party in the event that a member government (or government-owned entity) fails to perform its contractual obligations to a third party. Guarantees are regarded as outstanding when the underlying financial obligation of the borrower is incurred, and called when a guaranteed party demands payment under the guarantee. IDA would be required to perform under its guarantees if the payments guaranteed are not made by the borrower and the guaranteed party called the guarantee by demanding payment from IDA in accordance with the terms of the guarantee. At inception of the guarantees, IDA records the fair value of the obligation to stand ready and a corresponding guarantee fee receivable, included in Other Liabilities - Accounts payable and miscellaneous liabilities and in Other Assets, respectively, on the Balance Sheet. Upfront guarantee fees received are deferred and amortized over the life of the guarantee. In the event that a sovereign guarantee is called, IDA has the contractual right to require payment from the member country. HIPC Debt Initiative The Heavily Indebted Poor Countries (HIPC) Debt Initiative was launched in 1996 as a joint effort by bilateral and multilateral creditors to ensure that reform efforts of HIPCs would not be put at risk by unsustainable external debt burdens. Under the Enhanced HIPC Framework, implementation mechanisms include: (i) partial forgiveness of IDA debt service as it comes due, and ii) in the case of countries with a substantial amount of outstanding IBRD debt, partial repayment with IDA resources (excluding transfers from IBRD) of outstanding IBRD debt. Upon signature by IDA of the country specific legal notification, immediately following the decision by the Executive Directors of IDA to provide debt relief to the country (the Decision Point), the country becomes eligible for debt relief up to the nominal value equivalent of one third of the net present value of the total HIPC debt relief committed to the specific country. A Completion Point is reached when the conditions specified in the legal notification are met and the country’s other creditors have confirmed their full participation in the debt relief initiative. When the country reaches its Completion Point, IDA’s commitment to provide the total debt relief for which the country is eligible, becomes irrevocable. IDA’s provisioning policy for the HIPC Debt In itiative is discussed below. Donors compensate IDA on a “pay-as-you-go” basis to finance IDA’s forgone loan reflows (principal and service charge repayments) under the HIPC Debt Initiative. This means that for the debt relief provided by writing off the principal and charges during a replenishment, the donors compensate IDA for the forgone reflows through additional contributions in the relevant replenishment. These additional resources are accounted for as equity, as subscriptions and contributions, because they carry voting rights. MDRI Debt relief provided under the Multilateral Debt Relief Initiative (MDRI), which is characterized by the write-off of eligible loans upon qualifying borrowers reaching the HIPC Completion Point, is in addition to existing debt relief commitments provided by IDA and other creditors under the HIPC Debt Initiative. When a country reaches Completion Point, the applicable loans are written off. This write off occurs at the beginning of the quarterly period following the date on which the country reaches Completion Point. For forgone repayments under MDRI, donors established a separate MDRI replenishment spanning fiscal years 2007 through 2044 and pledged to compensate IDA for the costs of providing debt relief under MDRI on a “dol lar-for-dollar” basis. These additional resources are accounted for as equity, as subscriptions and contributions, because they carry voting rights. IDA FINANCIAL STATEMENTS: JUNE 30, 2021 77 Accumulated Provision for Losses on Loans and Other Exposures Management determines the appropriate level of accumulated provisions for losses on loan exposures, which reflects the expected losses inherent in IDA’s exposures. The accumulated provision for losses on loans and other exposures includes the accumulated provision for HIPC Debt Initiative and MDRI. HIPC Debt Initiative and MDRI The adequacy of the accumulated provision for the HIPC Debt Initiative and MDRI is based on both quantitative and qualitative analyses of various factors, including estimates of the Decision and the Completion point dates. IDA periodically reviews these factors and reassesses the adequacy of the accumulated provision for the HIPC Debt Initiative and MDRI. Upon approval by the Executive Directors of a country as potentially eligible for IDA debt relief under the Enhanced HIPC Initiative, the principal component of the estimated debt relief costs is recorded within the accumulated provision for loan losses on the Balance Sheet, and as a provision expense in the Statement of Income. This estimate is subject to periodic revision. Adjustments to the accumulated provision are recorded as a charge to or release of provision in the Statement of Income. The accumulated provision for HIPC Debt Initiative is reduced as debt relief is provided. The accumulated provision for HIPC Debt Initiative is reduced by the amount of the eligible loans written off when the country reaches Completion Point and becomes eligible for MDRI debt relief. Following the Executive Directors' approval of IDA's participation in the MDRI in June 2006, IDA fully provided for the estimated write-off of the principal component of debt relief to be delivered under the MDRI for the HIPC eligible countries confirmed by the Executive Directors as eligible for relief at that time. Loans Loan exposures are disaggregated into two groups: exposures in accrual status and exposures in nonaccrual status. In each group, a credit risk rating is then assigned to the exposures for each borrower (defined as the nominal amount of loans outstanding less the accumulated provision for loss under the HIPC Debt Relief Initiative, and MDRI). The total exposure for provisioning is the current exposure and the estimated exposure taking into account expected disbursements and repayments over the life of the instruments. The expected credit losses related to loans and other exposures are calculated over the life of the instruments based on the expected exposures, the expected default frequency (probability of default to IDA) and the estimated loss given default. The provision for expected losses is the sum of the expected annual losses over the life of the instruments. For countries in accrual status, these exposures are grouped in pools of borrowers with a similar risk rating. The determination of a borrower’s rating is based on various factors (see Note D—Loans and other exposures). Each risk rating is mapped to an expected default frequency using IDA’s credit migration matrix, based on historical observations of credit ratings at the beginning and at the end of each year. Expected losses on loan exposures comprise estimates of potential losses arising from default and nonpayment of principal and interest amounts due, and any economic loss due to delays in receiving payments. The estimated loss given default is determined at each balance sheet date, based on IDA’s historical experience as well as parameters adjusted for current conditions during the reasonable and supportable forecast period of IDA. The loss given default is based on the borrower’s eligibility, namely: IDA, Blend (IBRD and IDA) and IBRD, with the highest loss given default associated with IDA eligibility. The borrower’s eligibility is assessed at least annually. The main factors used to determine the loss given default are the estimated length of delays in receiving loan payments and the effective interest rate of the exposures. IDA’s loan portfolio comprises mostly fixed interest rate loans, therefore, the measurement of loss severity is not sensitive to market interest rate movements. For the calculation of expected credit losses, IDA applies a three-year reasonable and supportable forecast period representing the most reliable and available economic data during this period. IDA also applies a ten-year straight- line reversion to the mean to reflect the historical pattern of rating migration to the mean of its loan portfolio. This methodology is also applied to countries with exposures in nonaccrual status, although the expected default frequency is equal to one. At times, to reflect certain distinguishing circumstances of a particular nonaccrual situation, different input assumptions may be used for a specific country. 78 IDA FINANCIAL STATEMENTS: JUNE 30, 2021 All exposures for countries in nonaccrual status are individually assessed. Except for debt relief provided under the HIPC Debt Initiative and MDRI, it is IDA’s practice not to write off its loans. To date, no loans have been written off, other than under the HIPC Debt Initiative, MDRI and buy-down of loans. Management reassesses the adequacy of the accumulated provision on a quarterly basis and adjustments to the accumulated provision are recorded as a charge to or release of provision in the Statement of Income. In addition, reasonableness of the inputs used is reassessed at least annually. When a member country prepays its outstanding loans, it may receive a discount equivalent to the difference between the outstanding carrying amount and the present value of the remaining cash flows. In such instances, IDA records a provision for losses on loans equivalent to the discount provided, at the time when the prepayment terms are agreed between IDA and the member country. Loan Commitments IDA records the expected credit losses on loan commitments based on the projected disbursements of signed loan commitments (adjusted by cancellations based on historical experience), the probability of default and loss given default. The provision is included in Other liabilities - Accounts payable and miscellaneous liabilities on the Balance Sheet. Guarantees IDA records a contingent liability for the expected losses related to guarantees over the projected life of the instruments, which is determined based on the estimated exposure at default multiplied by the corresponding loss given default and expected default probability for the projected life of the guarantee. This provision, as well as the unamortized balance of the deferred guarantee fees, and the unamortized balance of the obligation to stand ready, are included in Other liabilities - Accounts payable and miscellaneous liabilities on the Balance Sheet. Statement of Cash Flows: For the purpose of IDA's Statement of Cash Flows, cash is defined as the amount of both Unrestricted cash and Restricted cash presented under the Due from banks line on the Balance Sheet. Restricted Cash: This mainly includes amounts which have been received from members as part of their subscriptions, which are restricted for specified purposes. Investments Investment securities are classified based on management’s intention on the date of purchase, their nature, and IDA’s policies governing the level and use of such investments. All investment securities are held in the trading portfolio except for a security purchased from IFC in 2015 which is classified as non-trading. While IDA does not plan to sell the IFC security, IDA elected to measure it at fair value, so that all of its investment securities are measured on the same basis. All investment securities and related financial instruments held by IDA are carried and reported at fair value, or at face value which approximates fair value. Where available, quoted market prices are used to determine the fair value of trading securities. Examples include most government and agency securities, asset-backed securities (ABS), mortgage-backed securities (MBS), to-be-announced securities (TBA securities) and futures contracts. For instruments for which market quotations are not available, fair values are determined using model-based valuation techniques, whether internally generated or vendor-supplied, that include the standard discounted cash flow method using observable market inputs such as yield curves, credit spreads, and constant prepayment rates. Where applicable, unobservable inputs such as constant prepayment rates, probability of default and loss severity are used. Unless quoted prices are available, time deposits are reported at face value, which approximates fair value, as they are short term in nature. The first-in first-out method is used to determine the cost of securities sold in computing the realized gains and losses on these instruments. Interest revenue is included in the Investments, net line in the Statement of Income. Unrealized mark-to-market gains and losses for investment securities and related financial instruments held in the investment portfolio are included in the Statement of Income. Realized gains and losses on trading securities are recognized in the Statement of Income when securities are sold. IDA may require collateral in the form of cash or approved liquid securities from individual counterparties under legal agreements that provide for collateralization, in order to mitigate its credit exposure to these counterparties. For collateral received in the form of cash from counterparties, IDA invests the amounts received and records the investment and a corresponding obligation to return the cash. Collateral received in the form of liquid securities is IDA FINANCIAL STATEMENTS: JUNE 30, 2021 79 only recorded on IDA’s Balance Sheet to the extent that it has been transferred under securities lending agreements in return for cash. Securities Purchased Under Resale Agreements, Securities Sold Under Repurchase Agreements, Securities Lent Under Securities Lending Agreements and Payable for Cash Collateral Received Securities purchased under resale agreements, securities sold under repurchase agreements, securities lent under securities lending agreements and payable for cash collateral received are recorded at face value, which approximates fair value, as they are short term in nature. IDA receives securities purchased under resale agreements, monitors the fair value of the securities and, if necessary, closes out transactions and enters into new repriced transactions. The securities transferred to counterparties under the repurchase and security lending arrangements and the securities transferred to IDA under the resale agreements have not met the accounting criteria for treatment as a sale. Therefore, securities transferred under repurchase agreements and security lending arrangements are retained as assets on the Balance Sheet, and securities received under resale agreements are not recorded on the Balance Sheet. Securities lent under securities lending agreements and sold under securities repurchase agreements as well as securities purchased under resale agreements are presented on a gross basis, which is consistent with the manner in which these instruments are settled. The interest earned with respect to securities purchased under resale agreements is included in Investments, net, line in the Statement of Income. The interest expense pertaining to the securities sold under repurchase agreements and security lending arrangements is included in the Borrowing expenses, net line in the Statement of Income. Borrowings IDA introduced long term borrowings through concessional partner loans for the first time in the fiscal year commencing July 1, 2014. The borrowing terms of the concessional partner loans aim to match the features of IDA’s concessional loans. As of June 30, 2021, these borrowings are unsecured and unsubordinated fixed rate debt in SDR component currencies. IDA may prepay some or the entire outstanding amounts without penalty. These borrowings are carried and reported at amortized cost. IDA has also issued debt instruments in the capital markets. IDA has elected the fair value option for all market debt issued, as of June 30, 2021. For debt carried at fair value, changes in fair value are recognized in the related Unrealized mark-to-market gains and losses on non-trading portfolios, net, line in the Statement of Income, except for changes in the fair value that relate to IDA’s own credit risk, which are reported in Other Comprehensive Income (OCI) as a Debit Valuation Adjustment (DVA). The DVA on fair value option elected liabilities is measured by revaluing each liability to determine the changes in fair value of that liability arising from changes in IDA’s cost of funding relative to the London Inter-Bank Offered Rate (LIBOR). Plain vanilla bonds and discount notes, if any, are valued using the standard discounted cash flow method which relies on observable market inputs such as yield curves, foreign exchange rates, basis spreads and funding spreads. Where available, quoted market prices are used to determine the fair value of short-term notes. For the purpose of the Statement of Cash Flows, new issuances and retirements pertaining to short term borrowings, if any, with an original maturity of less than 90 days, are presented on a net basis. In contrast, short term borrowings with an original maturity greater than 90 days and less than one year are presented on a gross basis. Interest expense relating to all debt instruments in IDA’s borrowing portfolio is measured on an effective yield basis and is reported as part of the Borrowing expenses, net line in the Statement of Income. For presentation purposes, amortization of discounts and premiums is also included in the Borrowing expenses, net line in the Statement of Income. Accounting for Derivatives IDA has elected not to designate any hedging relationships for accounting purposes. Rather, all derivative instruments are marked to fair value on the Balance Sheet, with changes in fair value accounted for through the Statement of Income. The presentation of derivative instruments on IDA’s Balance Sheet reflects the netting of derivative asset and liability positions and the related cash collateral received from the counterparty when a legally enforceable master netting agreement exists, and the other conditions set out in ASC Topic 210-20, Balance Sheet—Offsetting, are met. In addition, in the Notes to the financial statements, unless stated differently, derivatives are presented on a net basis by instrument. 80 IDA FINANCIAL STATEMENTS: JUNE 30, 2021 A master netting agreement is an industry standard agreement with a counterparty that permits multiple transactions governed by that agreement to be terminated or accelerated and settled through a single payment in a single currency in the event of a default (e.g., bankruptcy, failure to make a required payment or transfer securities or deliver collateral when due). Obligations under master netting agreements are often secured by collateral posted under an industry standard credit support annex to the master netting agreement. Upon default by the counterparty, the collateral agreement grants an entity the right to set-off any amounts payable by the counterparty against any posted collateral. IDA uses derivative instruments in its investment trading portfolio to manage interest rate and currency risks. These derivatives are carried and reported at fair value. Interest revenue (expenses) are reflected as part of Interest revenue, while unrealized mark-to-market gains and losses on these derivatives are reflected as part of the Unrealized mark- to-market gains (losses) on Investments-Trading portfolio, net line in the Statement of Income. IDA also uses derivatives in its loan, asset-liability management and borrowing portfolios. Within the asset-liability management portfolio, currency forward contracts are used to manage foreign exchange fluctuation risks and interest rate swap contracts under the Capital Value Protection program are used to manage interest rate volatility of IDA’s capital adequacy model. In the loan and borrowing portfolios, interest rate swaps are used to modify the interest rate characteristics of these portfolios. The interest component of these derivatives is recognized as an adjustment to the loan revenue and borrowing costs over the life of the derivative contracts and is included in Loans, net and Borrowing expenses, net lines in the Statement of Income. Changes in fair values of these derivatives are recorded in the Statement of Income as Unrealized mark-to-market gains and losses on non-trading portfolios, net. For the purpose of the Statement of Cash Flows, IDA has elected to report the cash flows associated with the derivative instruments that are used to economically hedge its borrowings and investments, in a manner consistent with the presentation of the related borrowing and investment cash flows. Derivative contracts include currency forward contracts, TBA securities, swaptions, exchange traded options and futures contracts, currency swaps and interest rate swaps. Currency swaps and interest rate swaps are primarily plain vanilla instruments and they are valued based on standard discounted cash flow methods using observable market inputs such as yield curves, foreign exchange rates, basis spreads and funding spreads. Most outstanding derivative positions are transacted over-the-counter and are therefore valued using internally developed valuation models. For commercial and non-commercial counterparties where IDA is in a net receivable position, IDA calculates a Credit Valuation Adjustment (CVA) to reflect credit risk. For net derivative positions with commercial and non-commercial counterparties where IDA is in a net payable position, IDA calculates a DVA to reflect its own credit risk. The CVA is calculated using the fair value of the derivative contracts, net of collateral received under credit support agreements, and the probability of counterparty default based on the Credit Default Swap (CDS) spread and, where applicable, proxy CDS spreads. The DVA calculation is generally consistent with the CVA methodology and incorporates IDA’s own credit spread as observed through the CDS market. Valuation of Financial Instruments IDA has an established and documented process for determining fair values. Fair value is based upon quoted market prices for the same or similar securities, where available. Financial instruments for which quoted market prices are not readily available are valued based on discounted cash flow models and other established valuation models. These models primarily use market-based or independently sourced market parameters such as yield curves, interest rates, volatilities, foreign exchange rates and credit curves, and may incorporate unobservable inputs. Selection of these inputs may involve some judgment. In instances where management relies on instrument valuations supplied by external pricing vendors, there are procedures in place to validate the appropriateness of the models used as well as the inputs applied in determining those values. IDA also has various internal controls in place to ensure that the valuations are appropriate where internally developed models are used. As of June 30, 2021 and June 30, 2020, IDA had no financial assets or liabilities measured at fair value on a non- recurring basis. Fair Value Hierarchy Financial instruments are categorized based on the priority of the inputs to the valuation technique. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1), the IDA FINANCIAL STATEMENTS: JUNE 30, 2021 81 next highest priority to observable market-based inputs or inputs that are corroborated by market data (Level 2) and the lowest priority to unobservable inputs that are not corroborated by market data (Level 3). Financial assets and liabilities recorded at fair value on the Balance Sheet are categorized based on the inputs to the valuation techniques as follows: Level 1: Financial assets and liabilities whose values are based on unadjusted quoted prices for identical assets or liabilities in active markets. Level 2: Financial assets and liabilities whose values are based on quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in non-active markets; or pricing models for which all significant inputs are observable, either directly or indirectly for substantially the full term of the asset or liability. Level 3: Financial assets and liabilities whose values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. IDA’s policy is to recognize transfers in and transfers out of levels as of the end of the reporting period in which they occur. Accounting for Contributions to Special Programs IDA recognizes unconditional grants such as contributions to special programs as an expense upon approval by the Executive Directors. Transfers Transfers from IBRD’s net income to IDA are recognized in the Statement of Income upon approval by the Board of Governors of IBRD. Similarly, transfers relating to grants made from IFC’s retained earnings to IDA are recognized in the Transfers from affiliated organizations and others on the Statement of Income and Other assets on the Balance Sheet upon execution of a grant agreement between IFC and IDA. In addition, IDA periodically receives contributions from trust funds and private institutions. IDA does not assign any voting rights for these contributions. Temporary restrictions relating to these contributions may arise from the timing of receipt of cash, or donor imposed restrictions as to use. Trust Funds To the extent that IDA acts as an agent for or controls IDA-executed trust funds, assets held on behalf of specified beneficiaries are recorded on IDA’s Balance Sheet, along with corresponding liabilities. Amounts disbursed from these trust funds are recorded as expenses with the corresponding amounts recognized as revenue. For Recipient- executed trust funds, since IDA acts as a trustee, no assets or liabilities relating to these activities are recorded on the Balance Sheet. In some trust funds, execution is split between Recipient-executed and IDA-executed portions. Decisions on assignment of funding resources between the two types of execution may be made on an ongoing basis; therefore, the execution of a portion of these available resources may not yet be assigned. IDA also acts as a financial intermediary to provide specific administrative or financial services with a limited fiduciary or operational role. These arrangements, referred to as Financial Intermediary Funds, include, for example, administration of debt service trust funds, financial intermediation and other more specialized limited fund management roles. For these arrangements, funds are held and disbursed in accordance with instructions from donors or, in some cases, an external governance structure or a body operating on behalf of donors. For Financial Intermediary Funds, since IDA acts as a trustee, no assets or liabilities relating to these activities are recorded on IDA’s Balance Sheet. Segment Reporting Based on an evaluation of its operations, management has determined that IDA has only one reportable segment since financial results are reviewed and resource allocation decisions are made at the entity level. 82 IDA FINANCIAL STATEMENTS: JUNE 30, 2021 Accounting and Reporting Developments Evaluated Accounting Standards: In January 2021, the FASB issued ASU 2021-01 - Reference Rate Reform (Topic 848): Scope. The ASU permits entities to elect certain optional expedients and exceptions when accounting for derivative contracts affected by changes in the interest rates used in computations affected by reference rate reform activities. IDA adopted the standard prospectively effective March 31, 2021, as permitted by the ASU, and the adoption did not have a material impact on the financial statements. In March 2020, the FASB issued ASU 2020-04 - Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The ASU provides temporary optional expedients and exceptions to the U.S. GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burden of the expected market transition from LIBOR and other interbank offered rates. To be eligible for the optional expedients, modifications of contractual terms that change (or have the potential to change) the amount or timing of contractual cash flows must be related only to replacement of a reference rate. The relief is temporary and is only available through December 31, 2022. IDA will apply the standard consistently to contractual amendments made to all applicable floating rate instruments indexed to IBOR (inter-bank offered rate) rates. IDA adopted the standard effective June 30, 2020 and the adoption did not have a material impact on the financial statements. In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820) – Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement, which amends the disclosure requirements of ASC 820. The guidance became effective for IDA from the quarter ending September 30, 2020. The adoption of this ASU had no material impact on IDA’s financial statements. In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (CECL ASU). The ASU and its subsequent amendments introduce a new model for the accounting of credit losses of loans and other financial assets measured at amortized cost. The current expected credit loss (CECL) model, requires an entity to estimate the credit losses expected over the life of an exposure, considering historical information, current information, and reasonable and supportable forecasts. Additionally, the ASUs require enhanced disclosures about credit quality and significant estimates and judgments used in estimating credit losses. For IDA, the ASUs became effective on July 1, 2020.  The transition adjustment increased the Accumulated Deficit by $802 million, which reflects the increase in the credit losses relating to loans and other exposures under CECL compared to the previous “incurred loss” model. The impact is mainly drive n by the requirement to provision over the full life of IDA’s long maturity profile credit exposures as well as the inclusion of signed loan commitments in the determination of the provision. See the table below for details of the CECL transition adjustment as of July 1, 2020. The transition adjustment had no impact to the Statement of Income. See Note D — Loans and Other Exposures, for additional details. In millions of U.S. dollars Impact of the June 30, 2020 adoption of the July 1, 2020 Accumulated provision related to Location on the Balance Sheet As reported CECL ASU Adjusted Accumulated provision for loan Loans outstanding losses $ 2,829 $ (59) $ 2,770 Accumulated provision for loan Debt Relief under HIPC/MDRI losses 1,591 - 1,591 Signed loan commitments Other liabilities - 859 859 Other exposures Other liabilities 72 2 74 Total accumulated provision $ 4,492 $ 802 $ 5,294 Accumulated Deficit $ (58,321) $ (802) $ (59,123) IDA FINANCIAL STATEMENTS: JUNE 30, 2021 83 NOTE B—MEMBERS’ SUBSCRIPTIONS AND CONTRIBUTIONS, AND MEMBERSHIP The movement in subscriptions and contributions paid-in is summarized below: Table B1: Subscriptions and contributions paid-in In millions of U.S. dollars June 30, 2021 June 30, 2020 Beginning of the fiscal year $ 241,343 $ 234,078 Cash contributions received a 3,442 3,336 Demand obligations received 4,901 4,233 Translation adjustment 766 (304) End of the fiscal year $ 250,452 $ 241,343 a. Includes any restricted cash subscriptions. During the fiscal year ended June 30, 2021, IDA encashed demand obligations totaling $4,913 million ($4,487 million—fiscal year ended June 30, 2020). NOTE C—INVESTMENTS The investment securities held by IDA are designated as either trading or non-trading. All securities are carried and reported at fair value, or at face value which approximates fair value. As of June 30, 2021, IDA’s Investments were mainly comprised of government and agency obligations (68%), with all the instruments being classified as either Level 1 or Level 2 within the fair value hierarchy. As of June 30, 2021, the largest holding of Investments-Trading with a single counterparty was Japanese Government instruments (14%). A summary of IDA’s investments composition is as follows: Table C1: Investments-composition In millions of U.S. dollars June 30, 2021 June 30, 2020 Trading Government and agency obligations $ 25,277 $ 24,198 Time deposits 11,460 8,398 Asset-backed securities 152 1,449 $ 36,889 $ 34,045 Non-trading (at fair value) Debt securities 487 625 Total $ 37,376 $ 34,670 84 IDA FINANCIAL STATEMENTS: JUNE 30, 2021 IDA manages its investments on a net portfolio basis. The following table summarizes IDA’s net portfolio position ; the presentation of derivative instruments is on a net instrument basis: Table C2: Net investment portfolio position In millions of U.S. dollars June 30, 2021 June 30, 2020 Investments Trading $ 36,889 $ 34,045 Non-trading 487 625 Total 37,376 34,670 Securities sold under repurchase agreements, securities lent under a securities lending agreements, and payable for cash collateral received - (109) Derivative Assets Currency swaps and currency forward contracts 167 19 Interest rate swaps - 1 Other b - 3 Total 167 23 Derivative Liabilities Currency swaps and currency forward contracts (65) (143) Interest rate swaps (17) (6) Other b - (1) Total (82) (150) Cash held in investment portfolio c 426 602 Receivable from investment securities traded and other assets d 107 636 Payable for investment securities purchased e (73) (101) Net Investment Portfolio $ 37,921 $ 35,571 a. As of June 30, 2021 there was no cash collateral received from counterparties under derivative agreements ($2 million - June 30, 2020, including $1 million excess collateral). b. These relate to TBA securities, swaptions, exchange traded options and futures contracts. c. This amount is included in Unrestricted cash under Due from Banks on the Balance Sheet. d. This amount is included in Other receivables and in Other assets, respectively, on the Balance Sheet. e. As of June 30, 2021 there were no short sales (less than $0.5 million—June 30, 2020) IDA uses derivative instruments to manage currency and interest rate risk in the investment portfolio. For details regarding these instruments, see Note F—Derivative Instruments. The maturity structure of IDA’s non-trading investment portfolio (principal amount due) is provided in the table below: Table C3: Maturity structure of non-trading investment portfolio In millions of U.S. dollars Period June 30, 2021 June 30, 2020 Less than 1 year $ 113 $ 125 Between 1 - 2 years 96 113 2 - 3 years 77 96 3 - 4 years 62 77 4 - 5 years 34 62 Thereafter 90 124 $ 472 $ 597 Commercial Credit Risk For the purpose of risk management, IDA is party to a variety of financial transactions, certain of which involve elements of credit risk. Credit risk exposure represents the maximum potential loss due to possible nonperformance IDA FINANCIAL STATEMENTS: JUNE 30, 2021 85 by obligors and counterparties under the terms of the contracts. For all securities, IDA limits trading to a list of authorized dealers and counterparties. In addition, credit limits have been established for counterparties by type of instrument and maturity category. Swap Agreements: Credit risk is mitigated through a credit approval process, volume limits, monitoring procedures and the use of mark-to-market collateral arrangements. IDA may require collateral in the form of cash or other approved liquid securities from individual counterparties to mitigate its credit exposure. IDA has entered into master derivative agreements, which contain legally enforceable close-out netting provisions. These agreements may further reduce the gross credit risk exposure related to the swaps. Credit risk with financial assets subject to a master derivative arrangement is further reduced under these agreements to the extent that payments and receipts with the counterparty are netted at settlement. The reduction in exposure as a result of these netting provisions can vary due to the impact of changes in market conditions on existing and new transactions. The extent of the reduction in exposure may therefore change substantially within a short period of time following the balance sheet date. For more information on netting and offsetting provisions, see Note F—Derivative Instruments. The following table is a summary of the collateral received by IDA related to swap transactions: Table C4: Collateral received In millions of U.S. dollars June 30, 2021 June 30, 2020 Collateral received Cash $ - $ - Securities - 68 Total collateral received $ - $ 68 Collateral permitted to be repledged $ - $ 68 Amount of collateral repledged - - Amount of Cash Collateral invested - - Securities Lending: IDA may engage in securities lending and repurchases, against adequate collateral, as well as securities borrowing and reverse repurchases (resales) of government and agency obligations, and ABS. These transactions have been conducted under legally enforceable master netting arrangements, which allow IDA to reduce its gross credit exposure related to these transactions. As of June 30, 2021, there were no amounts which could potentially be offset as a result of legally enforceable master netting arrangements (Nil— June 30, 2020). Transfers of securities by IDA to counterparties are not accounted for as sales as the accounting criteria for the treatment as a sale have not been met. Counterparties are permitted to repledge these securities until the repurchase date. Securities lending agreements and repurchase agreements expose IDA to several risks, including counterparty risk, reinvestment risk, and risk of a collateral gap (increase or decrease in the fair value of collateral pledged). IDA has procedures in place to ensure that trading activity and balances under these agreements are below predefined counterparty and maturity limits, and to actively monitor net counterparty exposure, after collateral, through daily mark-to-market. Whenever the collateral pledged by IDA related to its borrowings under securities lending agreements and repurchase agreements declines in value, the transaction is re-priced as appropriate by returning cash or pledging additional collateral. As of June 30, 2021, there were no liabilities relating to securities transferred under repurchase or securities lending agreements ($107 million — June 30, 2020, comprised entirely of government and agency obligations, with agreements of overnight and continuous remaining contractual maturity). As of June 30, 2021, none of the liabilities relating to securities transferred under repurchase or securities lending Agreements remained unsettled at that date (Nil— June 30, 2020). There were no replacement trades entered into in anticipation of maturing trades of a similar amount (Nil— June 30, 2020). In the case of resale agreements, IDA receives collateral in the form of liquid securities and is permitted to repledge these securities. While these transactions are legally considered to be true purchases and sales, the securities received are not recorded on IDA’s balance sheet as the accounting c riteria for treatment as a sale have not been 86 IDA FINANCIAL STATEMENTS: JUNE 30, 2021 met. As of June 30, 2021, and June 30, 2020, there were no securities purchased under resale agreements, nor were there any such instruments that remained unsettled on those dates. NOTE D—LOANS AND OTHER EXPOSURES IDA’s loans and other exposures are generally made to, or guaranteed by, member countries of IDA. Loans are carried at amortized cost. Based on IDA’s internal credit quality indicators, the majority of the loans outstanding are in the Medium and High risk classes. IDA excludes the interest and service charges receivable balance from the amortized cost basis and the related disclosures as permitted by U.S. GAAP. As of June 30, 2021, accrued interest income and service charges on loans of $502 million is presented in Other receivables – Accrued interest and commitment charges on the Balance Sheet. As of June 30, 2021, loans outstanding totaling $932 million (0.5% of the portfolio) from three borrowers, remain in nonaccrual status. On March 25, 2021, all remaining loans to Sudan were restored to accrual status, upon receipt of overdue amounts, in accordance with IDA’s policy. Maturity Structure The maturity structure of loans outstanding was as follows: Table D1: Loans - Maturity structure In millions of U.S. dollars June 30, 2021 June 30, 2020 July 01, 2021 through June 30, 2022 $ 7,415 July 01, 2020 through June 30, 2021 $ 6,688 July 01, 2022 through June 30, 2026 36,318 July 01, 2021 through June 30, 2025 31,134 July 01, 2026 through June 30, 2031 46,624 July 01, 2025 through June 30, 2030 40,491 Thereafter 91,147 Thereafter 87,067 Total $ 181,504 Total $ 165,380 Currency Composition Loans outstanding had the following currency composition: Table D2: Loans outstanding- Currency composition In millions of U.S. dollars June 30, 2021 June 30, 2020 Euro $ 7,407 $ 4,715 U.S. dollar 10,123 7,812 SDR 163,964 152,853 JPY 10 - Total $ 181,504 $ 165,380 Credit Quality of Sovereign Loans Based on an evaluation of IDA’s exposures, management has determined that IDA has one portfolio seg ment – Sovereign Exposures. IDA’s loans constitute the majority of the Sovereign Exposures portfolio segment. IDA’s country risk ratings are an assessment of its borrowers’ ability and willingness to repay IDA on time and in full. These ratings are internal credit quality indicators. Individual country risk ratings are derived on the basis of both quantitative and qualitative analyses. The components considered in the analysis can be grouped broadly into eight categories: political risk, external debt and liquidity, fiscal policy and public debt burden, balance of payments risks, economic structure and growth prospects, monetary and exchange rate policy, financial sector risks, and corporate sector debt and vulnerabilities. The analysis also takes into account Environmental, Social and Governance factors. For the purpose of analyzing the risk characteristics of IDA’s exposures, these exposures are grouped into three classes in accordance with assigned borrower risk ratings, which relate to the likelihood of loss: Low, Medium and High risk classes, as well as exposures in nonaccrual status. IDA FINANCIAL STATEMENTS: JUNE 30, 2021 87 IDA’s borrower country risk ratings are key determinants in the provision for loan losses. Country risk ratings are grouped in pools of borrowers with similar credit ratings for the purpose of the calculation of the expected credit losses. Country risk ratings are determined in review meetings that take place several times a year. All countries are reviewed at least once a year, or more frequently if circumstances warrant, to determine the appropriate ratings. An assessment was also performed to determine whether a qualitative adjustment was needed on the loan loss provision as of June 30, 2021, particularly in consideration of the COVID-19 pandemic. Management concluded that a qualitative adjustment beyond the regular application of IDA’s loan loss provision framework was not warranted. IDA considers loans to be past due when a borrower fails to make payment on any principal, interest or other charges due to IDA on the dates provided in the contractual loan agreement. The following tables provide an aging analysis of loans outstanding: Table D3: Loans-Aging structure In millions of U.S. dollars June 30, 2021 Total Past Days past due Up to 45 46-60 61-90 91-180 Over 180 Due Current Total Risk Class Low $ - $ - $ - $ - $ - $ - $ 659 $ 659 Medium - - - - - - 23,092 23,092 High 7 - - - - 7 156,814 a 156,821 Loans in accrual status 7 - - - - 7 180,565 180,572 Loans in nonaccrual status 7 1 3 9 399 419 513 932 Total $ 14 $ 1 $ 3 $ 9 $ 399 $ 426 $ 181,078 $ 181,504 Table D3.1 In millions of U.S. dollars June 30, 2020 Total Past Days past due Up to 45 46-60 61-90 91-180 Over 180 Due Current Total Risk Class Low $ * $ - $ - $ - $ - $ * $ 985 $ 985 Medium - - - - - - 23,100 23,100 High 3 * * - - 3 139,195 a 139,198 Loans in accrual status 3 * * - - 3 163,280 163,283 Loans in nonaccrual status 10 1 3 20 1,131 1,165 932 2,097 Total $ 13 $ 1 $ 3 $ 20 $ 1,131 $ 1,168 $ 164,212 $ 165,380 a. Includes PSW-related loans of $10 million ($5 million-June 30, 2020) * Indicates amount less than $0.5 million. IDA considers the signature date of a loan as the best indicator of the decision point in the origination process, rather than the disbursement date. 88 IDA FINANCIAL STATEMENTS: JUNE 30, 2021 The table below discloses the outstanding balances of IDA’s loan portfolio as of June 30, 2021 classified by the year the loan agreement was signed. Table D4: Loan portfolio vintage disclosure In millions of U.S. dollars June 30, 2021 Fiscal Year of origination CAT DDOs CAT DDOs Loans disbursed Converted Outstanding Prior and to Term as of June 30, Risk Class 2021 2020 2019 2018 2017 Years revolving Loans 2021 Low $ - $ - $ - $ - $ - $ 659 $ - $ - $ 659 Medium 401 564 255 64 488 21,320 - - 23,092 High 4,803 6,260 8,266 8,861 8,927 119,316 388 - 156,821 Loans in accrual status 5,204 6,824 8,521 8,925 9,415 141,295 388 - 180,572 Loans in nonaccrual status - - - - - 932 - - 932 Total $ 5,204 $ 6,824 $ 8,521 $ 8,925 $ 9,415 $ 142,227 $ 388 $ - $ 181,504 There were no Catastrophe Deferred Drawdown Option (CAT DDO) outstanding and revolving converted to term loans during the fiscal year ended June 30, 2021. Accumulated Provision for Losses on Loans and Other Exposures Management determines the appropriate level of accumulated provisions for losses, which reflects the expected losses inherent in IDA’s exposures. The provision for HIPC Debt Initiative and MDRI is based on quantitative and qualitative analyses of various factors, including estimates of Decision Point and Completion Point dates. These factors are reviewed periodically as part of the reassessment of the adequacy of the accumulated provision for loan losses. Provisions are released as qualifying debt service becomes due and is forgiven under the HIPC Debt Initiative and are reduced by the amount of the eligible loans written off when the country reaches Completion Point and becomes eligible for MDRI debt relief. The accumulated provision as of July 1, 2020 was increased by an $802 million transition adjustment recorded upon adoption of CECL. The transition adjustment corresponds to the difference between the accumulated provision calculated under the previous “incurred loss” model and the CECL model. Changes to the accumulated provision for losses on loans and other exposures are summarized below. IDA FINANCIAL STATEMENTS: JUNE 30, 2021 89 Table D5: Accumulated provisions In millions of U.S. dollars June 30, 2021 Debt relief Loans Loan under outstanding commitments HIPC/MDRI Other Total Accumulated provision, beginning of the fiscal year $ 2,829 $ - $ 1,591 $ 72 $ 4,492 CECL Transition adjustment (59) 859 - 2 802 Adjusted accumulated provision at the beginning of the fiscal year 2,770 859 1,591 74 5,294 Provision, net - charge (release) 77 166 (828) b 46 (539) Loans written off under: HIPC/MDRI - - (9) d - (9) Translation adjustment 99 29 18 - 146 Accumulated provision, end of the fiscal year $ 2,946 $ 1,054 $ 772 $ 120 $ 4,892 Including accumulated provision for losses on: Loans in accrual status $ 2,692 $ 485 $ 3,177 Loans in nonaccrual status 254 287 541 Total $ 2,946 $ 772 $ 3,718 Loans: Loans in accrual status $ 180,572 Loans in nonaccrual status 932 Total $ 181,504 Table D5.1: In millions of U.S. dollars June 30, 2020 Debt relief Loans Loan under outstanding commitments HIPC/MDRI Other Total Accumulated provision, beginning of the fiscal year $ 2,826 $ - $ 1,812 $ 70 $ 4,708 Provision, net - charge (release) a 33 - (206) c 3 (170) Loans written off under: Prepayments (3) - - - (3) HIPC/MDRI - - (10) d - (10) Translation adjustment (27) - (5) (1) (33) Accumulated provision, end of the fiscal year $ 2,829 $ - $ 1,591 $ 72 $ 4,492 Including accumulated provision for losses on: Loans in accrual status $ 2,556 $ 201 $ 2,757 Loans in nonaccrual status 273 1,390 1,663 Total $ 2,829 $ 1,591 $ 4,420 Loans: Loans in accrual status $ 163,283 Loans in nonaccrual status 2,097 Total $ 165,380 a. For the fiscal year ended June 30, 2020, the provision includes $3 million of discount on prepayment of loans b. Includes $819 million release of Sudan HIPC provision due to arrears clearance c. Includes $280 million release of Somalia HIPC provision due to arrears clearance d. Represents debt service reduction under HIPC 90 IDA FINANCIAL STATEMENTS: JUNE 30, 2021 Reported as Follows Balance Sheet Statement of Income Accumulated Provision for Losses on: Provision for losses on loans and other Loans Outstanding Accumulated provision for loan losses exposures, release Debt Relief under Provision for losses on loans and other Accumulated provision for loan losses HIPC/MDRI exposures, release Loan commitments and Other Provision for losses on loans and other Other liabilities Exposures exposures, release Loans to be written off under MDRI During the fiscal years ended June 30, 2021 and June 30, 2020, there were no loans written off under the MDRI. Overdue Amounts IDA considers loans to be past due when a borrower fails to make payment on any principal, service charges or interest due to IDA on the dates provided in the contractual loan agreement. As of June 30, 2021, there were no principal or charges under sovereign loans in accrual status which were overdue by more than three months. On March 25, 2021, Sudan paid all of their overdue principal and charges due to IDA of $849 million and $244 million, respectively. The outstanding loans remaining to Sudan were restored to accrual status on that date, in accordance with IDA’s policy. Revenue from loans for the nine months ended March 31, 2021, increased by $244 million, which represents service charges received on March 25, 2021, that would have been recognized in previous periods had these loans been in accrual status. The arrears clearance of the overdue payments to IDA for Sudan was accomplished using a bridge financing provided by a member country. On the same day, IDA disbursed two development grants totaling $1.3 billion to Sudan in support of re-engagement and reform programs. Sudan used $1.1 billion of the proceeds from the program to rep ay the bridge financing. Sudan’s arrears clearance led to a $ 831 million release of loan loss provision. On June 29, 2021, Sudan reached Decision Point under the HIPC debt initiative and became eligible for approximately $114 million in interim debt relief. As a result, IDA recorded a $114 million charge to the HIPC provision for losses on Sudan’s outstanding loans as of June 30, 202 1. The following tables provide a summary of selected financial information for loans in nonaccrual status: Table D6: Loans in nonaccrual status In millions of U.S. dollars Overdue amounts Average Provision Provision Nonaccrual Recorded recorded Principal for debt for loan Borrower since investment a investment Outstanding relief losses b Principal Charges Eritrea March 2012 $ 446 $ 446 $ 446 $ 287 $ 17 $ 103 $ 33 Syrian Arab Republic June 2012 14 14 14 - 1 12 1 Zimbabwe October 2000 472 472 472 - 236 304 68 Total - June 30, 2021 $ 932 $ 932 $ 932 $ 287 $ 254 $ 419 $ 102 Total - June 30, 2020 $ 2,097 $ 2,093 $ 2,097 $ 1,390 $ 273 $ 1,165 $ 324 a. A loan loss provision has been recorded against each of the loans in nonaccrual status. b. Loan loss provisions are determined after taking into account accumulated provision for debt relief. During the fiscal years ended June 30, 2021 and June 30, 2020, no new loans were placed into nonaccrual status. IDA FINANCIAL STATEMENTS: JUNE 30, 2021 91 Table D7: Service charge revenue not recognized In millions of U.S. dollars Fiscal Year Ended June 30, 2021 2020 2019 Service charge revenue not recognized as a result of loans being in nonaccrual status $ 7 $ 15 $ 19 During the fiscal year ended June 30, 2021, no service charge revenue was recognized on loans in nonaccrual status (less than $1 million—fiscal year ended June 30, 2020 and less than $1 million —fiscal year ended June 30, 2019). Guarantees Guarantees of $2,513 million were outstanding as of June 30, 2021 ($2,362 million – June 30, 2020). This amount includes $484 million relating to the PSW ($308 million—June 30, 2020). The outstanding amount of guarantees represent the maximum potential undiscounted future payments that IDA could be required to make under these guarantees that is not included on the Balance Sheet. The guarantees issued by IDA have original maturities ranging between 2 and 22 years, and expire in decreasing amounts through 2041. As of June 30, 2021, liabilities related to IDA’s obligations under guarantees of $ 138 million ($138 million— June 30, 2020), have been included in Other liabilities on the Balance Sheet. These include the accumulated provision for guarantee losses of $109 million ($66 million— June 30, 2020). The cumulative effect of the adoption of CECL was a decrease of $3 million in the accumulated provision for guarantee losses as of July 1, 2020. During the fiscal years ended June 30, 2021 and June 30, 2020, no guarantees provided by IDA to sovereign or sub- sovereign borrowers were called. As of June 30, 2021 IDA-PSW Blended Finance Facility guarantees under the Small Loan Guarantee Program pursuant to the risk-sharing agreement between IDA and IFC were called for an amount less than $0.5 million. During the fiscal years ended June 30 2021 and June 30, 2020, no other guarantees provided by IDA under the PSW were called. Concentration Risk Loan revenue comprises service charges and interest charges on outstanding loan balances. For the fiscal year ended June 30, 2021, loan revenue from two countries of $242 million and $218 million were each in excess of ten percent of total loan revenue. The following table presents IDA’s loans outstanding and associated loan revenue by geographic region: Table D8: Loan revenue and outstanding balance by geographic region In millions of U.S. dollars As of and for the fiscal years ended June 30, 2021 2020 Service and Loans Service and Loans Region Interest Charges c Outstanding Interest Charges c Outstanding South Asia $ 676 $ 64,141 $ 621 $ 59,629 Eastern and Southern Africa a 639 b 48,508 408 43,598 Western and Central Africa a 330 34,786 266 29,701 East Asia and Pacific 230 20,460 209 19,602 Europe and Central Asia 114 7,821 126 7,388 Latin America and the Caribbean 42 3,267 34 2,925 Middle East and North Africa 20 2,511 21 2,532 Others d 1 10 - 5 Total $ 2,052 $ 181,504 $ 1,685 $ 165,380 a. Effective July 1st, 2020, Africa region has been reorganized into two regions: Eastern and Southern Africa & Western and Central Africa. b. Includes $248 million of service charges pertaining to Sudan. c. Excludes $2 million of interest rate swap expenses related to loan hedges ($1 million-June 30, 2020). d. Represents loans under the PSW. 92 IDA FINANCIAL STATEMENTS: JUNE 30, 2021 NOTE E—BORROWINGS IDA’s borrowings comprise both concessional partner loans from IDA’s members and market borrowings. Concessional partner loans are unsecured and unsubordinated fixed rate debt in SDR component currencies. IDA may prepay some or the entire outstanding amounts without penalty. These borrowings are reported at amortized cost, and have original maturities of 25 and 40 years, with the final maturity in 2060. This does not include the proceeds received under the grant component of the concessional partner loan agreements, included in equity for which voting rights have been attributed. Table E1: Borrowings-concessional partner loans outstanding In millions of U.S dollars Concessional Partner Loans outstanding Principal at face Net unamortized premium value (discount) Total June 30, 2021 $ 9,495 $ (1,736) $ 7,759 June 30, 2020 $ 9,360 $ (1,725) $ 7,635 Market borrowings are unsecured and unsubordinated fixed debt in a variety of currencies. Some of these instruments are callable. IDA has elected the fair value option for these instruments, which have original maturities that range from 34 days to 15 years, with the final maturity in 2036. IDA uses derivative contracts to manage the currency risk as well as the interest rate risk in the market borrowings portfolio. For example, as part of IDA’s asset-liability management strategy, IDA may also enter into derivative transactions to convert fixed rate bonds into floating rate instruments. For details regarding the derivatives used in the borrowing portfolio, see Note F—Derivative Instruments. Table E2: Market borrowings after derivatives, at fair value In millions of U.S. dollars June 30, 2021 June 30, 2020 Market borrowings $ 20,555 $ 12,131 Currency swaps, net (97) 40 Interest rate swaps, net 118 (153) Total $ 20,576 $ 12,018 As of June 30, 2021, all of the instruments in IDA’s borrowing portfolio were classified as Level 2, within the fair value hierarchy. The following table provides a summary of the interest rate characteristics of IDA’s borrowings: Table E3: Borrowings-Interest rate composition In millions of U.S. dollars June 30, 2021 WAC a June 30, 2020 WAC a Fixed $ 28,404 0.99 % $ 19,610 1.14 % Variable - - - - Borrowings b $ 28,404 0.99 % $ 19,610 1.14 % Fair Value Adjustment (90) 156 Total Borrowings $ 28,314 $ 19,766 a. WAC refers to weighted average cost. b. At amortized cost. IDA FINANCIAL STATEMENTS: JUNE 30, 2021 93 The currency composition of debt in IDA’s borrowing portfolio before derivatives was as follows: Table E4: Borrowings-Currency composition before derivatives June 30, 2021 June 30, 2020 Euro 18 % 18 % Japanese yen 14 20 Pound sterling 17 17 U.S. dollar 49 43 Others 2 2 100 % 100 % The maturity structure of IDA’s borrowings outstanding was as follows: Table E5: Borrowings-Maturity structure In millions of U.S. dollars Period June 30, 2021 June 30, 2020 Less than 1 year $ 4,724 $ 5,840 1 - 2 years 1,713 120 2 - 3 years 146 1,740 3 - 4 years 2,837 137 4 - 5 years 4,154 2,564 Thereafter 16,476 11,090 Total a $ 30,050 $ 21,491 a. For June 30, 2021, total includes net unamortized discount of $1,736 million ($1,725 million—June 30, 2020) for Concessional Partner Loans. The following table provides information on the unrealized mark-to-market gains or losses on market borrowings included in the Statement of Income: Table E6: Unrealized mark-to-market gains or losses relating to market borrowings In millions of U.S. dollars Reported as 2021 2020 2019 Unrealized mark-to-market gains (losses) on non-trading portfolios, net $ 318 $ (106) $ (63) 94 IDA FINANCIAL STATEMENTS: JUNE 30, 2021 NOTE F—DERIVATIVE INSTRUMENTS IDA uses derivative instruments in its investment, loan and borrowing portfolios, for asset/liability management purposes, and to assist clients in managing risks. The following table summarizes IDA’s use of derivatives in its various financial portfolios. Table F1: Use of derivatives in various financial portfolios Portfolio Derivative instruments used Purpose/Risk being managed Risk management purposes: Interest rate swaps, currency forward contracts, Manage currency and interest rate risk in the Investments-Trading currency swaps, options, swaptions, futures portfolio. contracts and TBA securities Currency forward contracts, currency swaps and Manage currency and interest rate risks. Other assets/liabilities interest rate swaps Loans Interest rate swaps Manage interest rate risk in the portfolio. Manage currency and interest rate risk in the Borrowings Interest rate swaps and currency swaps portfolio. Other purposes: Client operations Structured swaps Assist clients in managing risks. The derivatives in the related tables of Note F are presented on a net basis by instrument. A reconciliation to the Balance Sheet presentation is shown in table F2. Offsetting assets and liabilities IDA enters into International Swaps and Derivatives Association, Inc. (ISDA) master netting agreements with substantially all of its derivative counterparties. These legally enforceable master netting agreements give IDA the right to liquidate securities held as collateral and to offset receivables and payables with the same counterparty, in the event of a default by the counterparty. The following tables summarize the gross and net derivative positions by instrument type. Instruments that are in a net asset position are included in the Derivative Assets columns and instruments that are in a net liability position are included in the Derivative Liabilities columns. The gross columns represent the fair value of the instrument leg that is in an asset or liability position that are then netted with the other leg of the instrument in the gross offset columns. The effects of the master netting agreements are applied on a aggregate basis to the total derivative asset and liability positions and are presented net of any cash collateral received on the Balance Sheet in accordance with ASC 815 – Derivatives and Hedging. The net derivative asset positions in the tables below have been further reduced by any securities received as collateral to disclose IDA’s net exposure on its derivative asset positions. IDA FINANCIAL STATEMENTS: JUNE 30, 2021 95 Table F2: Derivatives assets and liabilities before and after netting adjustments In millions of U.S. dollars June 30, 2021 Located on the Balance Sheet Derivative Assets Derivative Liabilities Gross Gross Gross Amounts Net Gross Amounts Net Amounts Offset Amounts Amounts Offset Amounts Interest rate swaps $ 1,105 $ (912) $ 193 $ 1,886 $ (1,577) $ 309 Currency swaps a 15,691 (15,231) 460 14,956 (14,449) 507 Other b - - - - - - d d Total $ 16,796 $ (16,143) $ 653 $ 16,842 $ (16,026) $ 816 Less: Amounts subject to legally enforceable e f master netting agreements $ 404 $ 408 Cash collateral received c - Net derivative positions on the Balance Sheet ` $ 249 $ 408 Less: Securities collateral received c - Net derivative exposure after collateral $ 249 Table F2.1 In millions of U.S. dollars June 30, 2020 Located on the Balance Sheet Derivative Assets Derivative Liabilities Gross Gross Gross Amounts Net Gross Amounts Net Amounts Offset Amounts Amounts Offset Amounts Interest rate swaps $ 189 $ (30) $ 159 $ 2,328 $ (1,231) $ 1,097 Currency swaps a 10,622 (9,909) 713 7,857 (7,593) 264 Other b 3 - 3 1 - 1 d d Total $ 10,814 $ (9,939) $ 875 $ 10,186 $ (8,824) $ 1,362 Less: Amounts subject to legally enforceable e f master netting agreements $ 738 $ 772 Cash collateral received c 1 Net derivative positions on the Balance Sheet 136 590 Less: Securities collateral received c 68 Net derivative exposure after collateral $ 68 a. Includes currency forward contracts. b. These include swaptions, exchange traded options, futures contracts and TBA securities. c. Does not include excess collateral received. d. Based on the net value per a derivative instrument e. Includes $2 million CVA adjustment ($7 million-June 30, 2020). f. Includes $6 million DVA adjustment ($41 million-June 30, 2020). 96 IDA FINANCIAL STATEMENTS: JUNE 30, 2021 The following table provides information about the credit risk exposures, at the instrument level, of IDA’s derivative instruments. Table F3: Credit risk exposure of the derivative instruments: In millions of U.S. dollars June 30, 2021 Currency swaps Interest (including currency Other a Total rate swaps forward contracts) Investments - Trading $ - $ 167 $ - $ 167 Asset/liability management 78 176 - 254 Other b 115 117 - 232 Total Exposure $ 193 $ 460 $ - $ 653 Table F3.1: In millions of U.S. dollars June 30, 2020 Currency swaps Interest (including currency Other a Total rate swaps forward contracts) Investments - Trading $ 1 $ 19 $ 3 $ 23 Asset/liability management - 691 - 691 Other b 158 3 - 161 Total Exposure $ 159 $ 713 $ 3 $ 875 a. Includes swaptions, exchange traded options and futures contracts and TBA securities. Exchange traded instruments are generally subject to daily margin requirements and are deemed to have no material credit risk. All swaptions, options, and futures contracts are interest rate contracts. b. Includes derivatives related to loans, borrowings and PSW. The volume of derivative contracts is measured using the U.S. dollar equivalent notional balance. The notional balance represents the face value or reference value on which the calculations of payments on the derivative instrument are determined. As of June 30, 2021, the notional of interest rate swap contracts was $33,432 million ($24,027 million as of June 30, 2020), currency swaps $30,349 million ($18,158 million as of June 30, 2020), there were no long or short positions of other derivatives ($1,992 million of long position and $507 million of short position as of June 30, 2020). Collateral: Under almost all of its ISDA master agreements, IDA is not required to post collateral as long as it maintains liquidity holdings at predetermined levels that are a proxy for a triple-A credit rating. After becoming a rated entity, IDA has started to enter into derivative agreements with commercial counterparties in which IDA is not required to post collateral as long as it maintains a triple-A rating. The aggregate fair value of all derivative instruments with credit-risk related contingent features that are in a liability position as of June 30, 2021 is $414 million ($719 million —June 30, 2020). As of June 30, 2021, IDA was not required to post any collateral in accordance with the relevant agreements. If the credit-risk related contingent features underlying these agreements were triggered to the extent that IDA would be required to post collateral as of June 30, 2021, the amount of collateral that would need to be posted would be $25 million ($58 million—June 30, 2020). Subsequent triggers of contingent features would require posting of additional collateral, up to a maximum of $414 million as of June 30, 2021 ($719 million—June 30, 2020). IDA FINANCIAL STATEMENTS: JUNE 30, 2021 97 Amounts of gains and losses on the non-trading derivatives, by instrument type and their location in the Statement of Income are as follows: Table F4: Unrealized mark-to-market gains or losses on non-trading derivatives In millions of U.S. dollars Unrealized mark-to-market gains (losses) Fiscal Year Ended June 30, Type of instrument Reported as 2021 2020 2019 Interest rate swaps Unrealized mark-to-market 898 (996) 58 gains (losses) on Non-Trading Currency forward contracts and currency swaps portfolios, net (101) 385 359 Total $ 797 $ (611) $ 417 The majority of the instruments in IDA’s investment portfolio are held for trading purposes. Within the trading portfolio, IDA holds highly rated fixed income instruments as well as derivatives. The trading portfolio is primarily held to ensure the availability of funds to meet future cash flow requirements and for liquidity management purposes. The following table provides information on the amount of gains and losses on the I DA’s investment trading portfolio (derivative and non-derivative instruments), and their location in the Statement of Income: Table F5: Unrealized mark-to-market gains or losses on investment trading portfolio In millions of U.S. dollars Unrealized mark-to-market gains Fiscal Year Ended June 30, Type of instrument Reported as 2021 2020 2019 Unrealized mark-to-market gains on Investment- Fixed income (including related derivatives) Trading portfolios, net $ 144 $ 207 $ 351 NOTE G—TRANSACTIONS WITH AFFILIATED ORGANIZATIONS IDA transacts with affiliated organizations as a recipient of transfers and grants, administrative and derivative intermediation services, and through cost sharing of IBRD’s sponsored pension and other postretirement benefit plans. Transfers and Grants Cumulative transfers and grants made to IDA as of June 30, 2021 were $20,202 million ($19,658 million—June 30, 2020). Details by transferor are as follows: Table G1: Transfers and grants In millions of U.S. dollars Beginning of Transfers during End of the Transfers from the fiscal year the fiscal year fiscal year Total $ 19,658 $ 544 $ 20,202 Of which transfers from: IBRD 15,756 331 16,087 IFC 3,672 213 3,885 98 IDA FINANCIAL STATEMENTS: JUNE 30, 2021 Receivables and Payables The total amounts receivable from (payable to) affiliated organizations is comprised of the following: Table G2: IDA’s receivables and payables with affiliated organizations In millions of U.S. dollars June 30, 2021 June 30, 2020 IBRD IFC Total IBRD IFC Total Administrative Services, net a $ (268) $ - $ (268) $ (271) $ - $ (271) Derivative Transactions Derivative assets, net 19 6 25 74 3 77 Derivative liabilities, net (27) (2) (29) (53) (3) (56) PSW-Blended Finance Facility b - 41 41 - 7 7 Pension and Other Postretirement Benefits 572 - 572 620 - 620 Investments - 487 487 - 625 625 $ 296 $ 532 $ 828 $ 370 $ 632 $ 1,002 a. Includes $293 million for the fiscal year ended June 30, 2021 ($238 million-June 30, 2020) receivable from IBRD for IDA's share of investments associated with Post-Retirement Contribution Reserve Fund (PCRF), which is a fund established to stabilize contributions made to the pension plans. b. Refer to Table G4: Summary of PSW-related transactions. The receivables from (payables to) these affiliated organizations are reported on the Balance Sheet as follows: Receivables / Payables related to: Reported as: Receivable for pension and other postretirement benefits Receivable from affiliated organization Net receivables (payables) for derivative transactions Derivative assets/liabilities, net Payable for administrative services a Payable to affiliated organization a. Includes amounts receivable from IBRD for IDA’s share of investments associated with PCRF. This receivable is included i n Receivable from affiliated organization on the Balance Sheet. Administrative Services The payable to IBRD represents IDA’s share of joint administrative expenses, including contributions to special programs, net of other revenue jointly earned. The allocation of expenses is based upon an agreed cost sharing formula, and amounts are settled quarterly. During the fiscal year ended June 30, 2021, IDA’s share of joint administrative expenses and contributions to special programs totaled $1,873 million ($1,824 million—fiscal year ended June 30, 2020 and $1,795 million—fiscal year ended June 30, 2019). This amount excludes IDA-executed trust fund expenses of $553 million ($586 million— fiscal year ended June 30, 2020 and $467 million—fiscal year ended June 30, 2019). Other revenue IDA’s share of other revenue jointly earned with IBRD during the fiscal year ended June 30, 2021 totaled $261 million ($316 million—fiscal year ended June 30, 2020 and $316 million—fiscal year ended June 30, 2019). This amount excludes IDA-executed trust fund revenue of $553 million ($586 million—fiscal year ended June 30, 2020 and $467 million—fiscal year ended June 30, 2019). The amount of fee revenue associated with services provided to other affiliated organizations is included in Other revenue in the Statement of Income, as follows: Table G3: Fee revenue from affiliated organizations In millions of U.S. dollars Fiscal Year Ended June 30, 2021 2020 2019 Fees charged to IFC $ 77 $ 80 $ 77 Fees charged to MIGA 5 5 5 IDA FINANCIAL STATEMENTS: JUNE 30, 2021 99 Pension and Other Postretirement Benefits The staff of IBRD perform functions for both IBRD and IDA, but all staff compensation is paid directly by IBRD. Accordingly, a portion of IBRD's staff and associated administrative costs is allocated to IDA based on an agreed cost sharing ratio using various indicators. The methodology for computing this share ratio is approved by the Executive Directors for both institutions. IBRD, along with IFC and MIGA, sponsors a defined benefit Staff Retirement Plan and Trust (SRP), the Retired Staff Benefits Plan and Trust (RSBP) and the Post-Employment Benefits Plan (PEBP) that cover substantially all of their staff members. The SRP provides regular defined pension benefits and also includes a cash balance component. The RSBP provides certain health and life insurance benefits to eligible retirees. The PEBP provides certain pension benefits administered outside the SRP. June 30 is used as the measurement date for these pension and other postretirement benefit plans. All costs, assets and liabilities associated with these plans are allocated between IBRD, IFC, and MIGA based upon their employees’ respective participation in the plans. While IDA is not a participating entity to these benefit plans, IDA shares in the costs and reimburses IBRD for its proportionate share of any contributions made to these plans by IBRD. During the fiscal year ended June 30, 2021, IDA’s share of IBRD’s costs relating to all the three plans totaled $494 million ($357 million—fiscal year ended June 30, 2020 and $299 million—fiscal year ended June 30, 2019). The receivable from IBRD represents IDA’s net share of prepaid costs for pension and other post retirement benefit plans and PEBP assets. These will be realized over the lives of the plan participants. The cost of any potential future liability arising from these plans would be shared by IBRD and IDA using the applicable share ratio. As of June 30, 2021, the SRP and the RSBP were underfunded by $320 million and $90 million, respectively. The PEBP, after reflecting IBRD and IDA’s share of assets which are included in IBRD’s investment portfolio of $1,806 million, was underfunded by $533 million. Derivative transactions IDA enters into currency forward contracts with IBRD acting as the intermediary with the market, primarily to convert donors’ expected contributions in national currencies under the Sixteenth and Seventeenth replenishments of IDA’s resources into the five currencies of the SDR basket. Investments – Non-trading During the fiscal year ended June 30, 2015, IDA purchased a debt security issued by IFC for a principal amount of $1,179 million, amortizing over a period of 25 years. The investment carries a fixed interest rate of 1.84% and has a weighted average maturity of 3 years. As of June 30, 2021, the principal amount due on the debt security was $472 million ($597 million—fiscal year ended June 30, 2020), and it had a fair value of $487 million ($625 million— fiscal year ended June 30, 2020). The investment is reported under Investments on the Balance Sheet. During the fiscal year ended June 30, 2021, IDA recognized interest income of $10 million from this investment ($12 million— fiscal year ended June 30, 2020 and $14 million—fiscal year ended June 30, 2019). Private Sector Window The PSW was created under Eighteenth Replenishment of IDA’s Resources (IDA18), which became effective beginning fiscal year ended June 30, 2018, to mobilize private sector investment in IDA-only countries and IDA- eligible Fragile and Conflict-affected States (FCS). In IDA18, PSW allocation was $1.4 billion which was fully committed. The PSW continued under IDA’s Nineteenth Replenishment of Resources (IDA19), which became effective beginning fiscal year ending June 30, 2021, with an initial allocation set at $2.5 billion which was revised to $1.7 billion. Under the fee arrangement for the PSW, IDA receives fee income for transactions executed under this window and reimburses IFC and MIGA for the related costs incurred in administering these transactions. 100 IDA FINANCIAL STATEMENTS: JUNE 30, 2021 The following tables provide a summary of all PSW related transactions under which IDA had an exposure as of June 30, 2021: Table G4: Summary of PSW related transactions In millions of U.S. dollars Net Asset/ (Liability) Facility Notional position Description Location on the Balance Sheet Local Currency Facility $ 90 $4 Currency swaps with IFC to support local Derivative assets/ liabilities, net currency denominated loans Accumulated Accumulated Facility Exposure Provision Description Exposure Provision MIGA Guarantee Facility $188 $22 Expanding the coverage of MIGA Political Risk Off Balance Other Insurance (PRI) products through shared first- Sheet item liabilities loss or risk participation similar to reinsurance Blended Finance Facility $296 $50 Sharing the first loss to support IFC's Small Off Balance Other Loan Guarantee Program, Global Trade Sheet item liabilities Finance Program and Working Capital Solutions in PSW eligible countries 41 Not Funding for IFC's PSW equity investment Other assets applicable 10 2 Concessional senior & sub-ordinated loans to Loans Accumulated support medium term projects outstanding Provision for Loan Losses NOTE H—TRUST FUNDS ADMINISTRATION IDA, alone or jointly with one or more of its affiliated organizations, administers on behalf of the donors, including members, their agencies and other entities, funds restricted for specific uses in accordance with administration agreements with the donors. Specified uses of the funds include, among others, co-financing of IDA lending projects, debt reduction operations for IDA members, technical assistance for borrowers including feasibility studies and project preparation, global and regional programs, and research and training programs. These funds are held in trust by IDA and/or IBRD, and are held in a separate investment portfolio which is not commingled with IDA and/or IBRD funds. Trust fund execution may be carried out in one of two ways: Recipient-executed or IDA-executed. Recipient-executed trust funds involve activities carried out by a recipient third-party executing agency. IDA enters into agreements with and disburses funds to such recipients, who then exercise spending authority to meet the objectives and comply with terms stipulated in the agreements. IDA-executed trust funds involve execution of activities by IDA as described in relevant administration agreements with donors, which define the terms and conditions for use of the funds. Spending authority is exercised by IDA, under the terms of the administration agreements. The executing agency services provided by IDA include, among others, activity preparation, analytical and advisory activities and project-related activities, including procurement of goods and services. The following table summarizes the expenses pertaining to IDA-executed trust funds: Table H1: Expenses pertaining to IDA-executed trust funds In millions of U.S. dollars Fiscal Year Ended June 30, 2021 2020 2019 IDA-executed trust funds expenses $ 553 $ 586 $ 467 IDA FINANCIAL STATEMENTS: JUNE 30, 2021 101 These amounts are included in Administrative expenses and the corresponding revenue is included in Revenue from externally funded activities in the Statement of Income. Administrative expenses primarily relate to staff cost, travel and consultant fees. The following table summarizes undisbursed contributions made by third party donors to IDA-executed trust funds, recognized on the Balance Sheet: Table H2: Undisbursed contributions made by third party donors to IDA-executed trust funds In millions of U.S. dollars June 30, 2021 June 30, 2020 IDA-executed trust funds $ 749 $ 707 These amounts are included in Other Assets and the corresponding liabilities are included in Accounts payable and miscellaneous liabilities on the Balance Sheet. Revenues IDA’s revenues for the administration of trust fund operations were as follows: Table H3: IDA’s revenues for the administration of t rust fund operations In millions of U.S. dollars Fiscal Year Ended June 30, 2021 2020 2019 Revenues $ 38 $ 41 $ 46 These amounts are included in Other non-interest revenue in the Statement of Income. Amounts collected from donor contributions for administration activities, but not yet earned, totaling $70 million at June 30, 2021 ($65 million—June 30, 2020) are included in Other Assets and in Accounts payable and miscellaneous liabilities, respectively, on the Balance Sheet. Transfers Received Under the agreements governing the administration of certain trust funds, IDA may receive any surplus assets as transfers upon the termination of these trust funds. In addition, as loans are repaid to trust funds, in certain cases the repayments are transferred to IDA. During the fiscal year ended June 30, 2021 no funds were recorded as Transfers from affiliated organizations and others, under these arrangements (Nil—fiscal year ended June 30, 2020 and $10 million —fiscal year ended June 30, 2019). NOTE I—DEVELOPMENT GRANTS A summary of changes to the amounts payable for development grants is presented below: Table I1: Grants payable In millions of U.S. dollars June 30, 2021 June 30, 2020 Balance, beginning of the fiscal year $ 9,141 $ 12,345 Unconditional grants approved - - Disbursement (including PPA grant activity)a (2,417) (2,472) Cancellations (235) (598) Translation adjustment 331 (134) Balance, end of the fiscal year $ 6,820 $ 9,141 a. Project Preparation Advances (PPA) 102 IDA FINANCIAL STATEMENTS: JUNE 30, 2021 A summary of the development grant expenses is presented below: Table I2: Grant activity In millions of U.S dollars Fiscal Year Ended June 30, 2021 2020 Conditional development grants disbursed a $ 3,829 $ 2,216 Unconditional development grants approved - - Less: Cancellations (235) (598) Disbursement of grant advances not yet expensed b (1,033) (236) Add: Grant advances meeting expense condition c 269 27 Other disbursements d - 66 Grant Expenses $ 2,830 $ 1,475 Grants Approved $ 12,192 $ 7,997 a. Disbursements of conditional grants approved on or after July 1, 2019. b. Disbursements made over the period for which the expense recognition criteria has not yet been met. c. Prior disbursement of grant advances meeting the criteria to be expensed over the period. d. Comprises PEF conditional grants and CAT DDOs approved prior to July 1, 2019. As of June 30, 2021, the cumulative amount of conditional grants approved but not yet expensed was $14,836 million. NOTE J—ACCUMULATED OTHER COMPREHENSIVE INCOME Comprehensive income consists of net income (loss) and other gains and losses affecting equity that, under U.S. GAAP, are excluded from net income (loss). For IDA, comprehensive income (loss) is comprised of net income (loss), DVA on fair value option elected liabilities and currency translation adjustments on functional currencies. These items are presented in the Statement of Comprehensive Income. The following table presents the changes in Accumulated Other Comprehensive (Loss) Income balances: Table J1: Changes in accumulated other comprehensive income (loss) In millions of U.S. dollars Fiscal Year Ended June 30, 2021 2020 2019 Balance, beginning of the fiscal year $ (3,927) $ (2,408) $ (675) Currency translation adjustments on functional currencies 5,647 (1,526) (1,735) DVA on fair value option elected liabilities (64) 7 2 Balance, end of the fiscal year $ 1,656 $ (3,927) $ (2,408) IDA FINANCIAL STATEMENTS: JUNE 30, 2021 103 NOTE K—FAIR VALUE DISCLOSURES Valuation Methods and Assumptions As of June 30, 2021, and June 30, 2020, IDA had no financial assets or liabilities measured at fair value on a non – recurring basis. Due from Banks The carrying amount of unrestricted and restricted cash is considered a reasonable estimate of the fair value of these positions. Loans and loan commitments There were no loans carried at fair value as of June 30, 2021 and June 30, 2020. IDA’s loans and loan commitments would be classified as Level 3 within the fair value hierarchy. Summarized below are the techniques applied in determining the fair value s of IDA’s financial instruments. Investment securities Where available, quoted market prices are used to determine the fair value of trading securities. Examples include most government and agency securities and futures contracts. For instruments for which market quotations are not available, fair values are determined using model-based valuation techniques, whether internally-generated or vendor-supplied, that include the standard discounted cash flow method using observable market inputs such as yield curves, credit spreads, and constant prepayment spreads. Where applicable, unobservable inputs such as conditional prepayment rates, probability of default, and loss severity are used. Unless quoted prices are available, time deposits are reported at face value, which approximates fair value, as they are short term in nature. Securities purchased under resale agreements, securities sold under repurchase agreements, and securities lent under securities lending agreements These securities are of a short-term nature and are reported at face value, which approximates fair value. Borrowings The fair value of IDA’s borrowings is calculated using a discounted cash flow method which relies on observable market inputs such as yield curves, foreign exchange rates, basis spreads and funding spreads. Derivative instruments Derivative contracts include currency forward contracts, TBA securities, swaptions, exchange traded options and futures contracts, currency swaps and interest rate swaps. Where available, quoted market prices are used to determine the fair value of trading securities. Examples include exchange traded options and futures contracts. For instruments for which market quotations are not available, fair values are determined using model-based valuation techniques, whether internally-generated or vendor-supplied, that include the standard discounted cash flow method using observable market inputs such as yield curves, foreign exchange rates, credit spreads, basis spreads, funding spreads and constant prepayment spreads. Where applicable, unobservable inputs such as constant prepayment rates, probability of default, and loss severity are used. Valuation adjustments on fair value option elected liabilities The DVA on fair value option elected liabilities (market borrowings) is being measured by revaluing each liability to determine the changes in fair value of that liability arising from changes in IDA’s cost of funding relative to LIBOR. 104 IDA FINANCIAL STATEMENTS: JUNE 30, 2021 The table below presents IDA’s estimates of fair value of its financial asse ts and liabilities along with their respective carrying amounts. Table K1: Fair value and carrying amounts of financial assets and liabilities In millions of U.S dollars June 30, 2021 June 30, 2020 Carrying Value Fair Value Carrying Value Fair Value Assets Due from banks $ 496 $ 496 $ 674 $ 674 Investments (including securities transferred under repurchase or securities lending agreements) 37,376 37,376 34,670 34,670 Net loans outstanding 177,779 164,606 160,961 149,597 Derivative assets, net 249 249 136 136 Liabilities Borrowings Market borrowings 20,555 20,555 12,131 12,131 Concessional partner loans 7,759 9,516 7,635 10,031 Securities sold under repurchase agreements, securities lent under securities lending agreements, and payable for cash collateral received - - 108 108 Derivative liabilities, net 408 408 590 590 As of June 30, 2021, IDA’s signed loan commitments were $60.8 billion ($49.6 billion – June 30, 2020) and had a fair value of $(5.4) billion ($(5.1) billion – June 30, 2020). IDA FINANCIAL STATEMENTS: JUNE 30, 2021 105 The following tables present IDA’s fair value hierarchy for assets and liabilities measured at fair value on a recurring basis. Table K2: Fair value hierarchy of IDA’s assets and liabilities In millions of U.S. dollars Fair Value Measurements on a Recurring Basis As of June 30, 2021 Level 1 Level 2 Level 3 Total Assets: Investments—Trading Government and agency obligations $ 7,852 $ 17,425 $ - $ 25,277 Time deposits 728 10,732 - 11,460 ABS - 152 - 152 Total Investments—Trading 8,580 28,309 - 36,889 Investments—Non-trading (at fair value) - 487 - 487 Total Investments $ 8,580 $ 28,796 $ - $ 37,376 Derivative assets: Currency swaps and currency forward contracts a $ - $ 460 $ - $ 460 Interest rate swaps - 193 - 193 Other b - - - - $ - $ 653 $ - $ 653 Less: Amounts subject to legally enforceable master netting agreements c 404 Cash collateral received - Derivative assets, net $ 249 Liabilities: Market Borrowings $ - $ 20,555 $ - $ 20,555 Securities sold under repurchase agreements and securities lent under security lending agreements e $ - $ - $ - $ - Derivative liabilities: Currency swaps and currency forward contracts $ - $ 507 $ - $ 507 Interest rate swaps - 309 - 309 Other b - - - - $ - $ 816 $ - $ 816 Less: Amounts subject to legally enforceable master netting agreements d 408 Derivative liabilities, net $ 408 a. Includes structured swaps. b. These include swaptions, exchange traded options, futures contracts and TBA securities. c. Includes $2 million CVA. d. Includes $6 million DVA. e. Excludes amount payable for cash collateral received Nil. 106 IDA FINANCIAL STATEMENTS: JUNE 30, 2021 Table K2.1 In millions of U.S. dollars Fair Value Measurements on a Recurring Basis As of June 30, 2020 Level 1 Level 2 Level 3 Total Assets: Investments—Trading Government and agency obligations $ 9,711 $ 14,487 $ - $ 24,198 Time deposits 2,458 5,940 - 8,398 ABS - 1,449 - 1,449 Total Investments—Trading 12,169 21,876 - 34,045 Investments—Non-trading (at fair value) - 625 - 625 Total Investments $ 12,169 $ 22,501 $ - $ 34,670 Derivative assets: Currency swaps and currency forward contracts a $ - $ 713 $ - $ 713 Interest rate swaps - 159 - 159 Other b - 3 - 3 $ - $ 875 $ - $ 875 Less: c Amounts subject to legally enforceable master netting agreements 738 Cash collateral received 1 Derivative assets, net $ 136 Liabilities: Market Borrowings $ - $ 12,131 $ - $ 12,131 Securities sold under repurchase agreements and securities lent under security lending agreements e $ - $ 107 $ - $ 107 Derivative liabilities: Currency swaps and currency forward contracts $ - $ 264 $ - $ 264 Interest rate swaps - 1,097 - 1,097 Other b - 1 - 1 $ - $ 1,362 $ - $ 1,362 Less: Amounts subject to legally enforceable master netting agreements d 772 Derivative liabilities, net $ 590 a. Includes structured swaps. b. These include swaptions, exchange traded options, futures contracts and TBA securities. c. Includes $7 million CVA. d. Includes $41 million DVA. e. Excludes amount payable for cash collateral received $2 million. IDA FINANCIAL STATEMENTS: JUNE 30, 2021 107 Presented below is the difference between the aggregate fair value and aggregate contractual principal balance of non-trading securities in the investment portfolio: Table K3: Investment portfolio-Non-trading securities In millions of U.S dollars Fair value Principal amount due Difference June 30, 2021 $ 487 $ 472 $ 15 June 30, 2020 $ 625 $ 597 $ 28 Presented below is the difference between the aggregate fair value and aggregate contractual principal balance of market borrowings: Table K4: Market Borrowings-Fair value and contractual principal balance In millions of U.S. dollars Principal Due Fair Value Upon Maturity Difference June 30, 2021 $ 20,555 $ 20,659 $ (104) June 30, 2020 $ 12,131 $ 11,952 $ 179 Valuation adjustments on fair value option elected liabilities During the fiscal year ended June 30, 2021, IDA recorded unrealized mark-to-market loss of $64 million ($7 million unrealized mark-to-market gains – June 30, 2020) in Other Comprehensive Income, in relation to the changes in its own credit (DVA) on fair value option elected liabilities (market borrowings). As of June 30, 2021, IDA’s Balance Sheet included a DVA of $56 million cumulative loss ($8 million cumulative gain—June 30, 2020) in Accumulated other comprehensive income, associated with the changes in IDA’s own credit for its market borrowings. 108 IDA FINANCIAL STATEMENTS: JUNE 30, 2021 The following table reflects the components of the unrealized mark-to-market gains or losses on IDA’s trading and non-trading portfolios, net. Table K5: Unrealized mark-to-market gains (losses) on trading and non-trading portfolios, net In millions of U.S. dollars Fiscal Year Ended June 30, 2021 Unrealized gains Realized gains Unrealized gains (losses) excluding (losses) (losses) realized amounts a Investments- Trading—Note F $ 185 $ (41) $ 144 Non-trading portfolios, net Asset-liability management—Note F - 1,080 1,080 Investment portfolio—Note C - (12) (12) Other b - 34 34 Total $ - $ 1,102 $ 1,102 Table K5.1: In millions of U.S. dollars Fiscal Year Ended June 30, 2020 Unrealized gains Realized gains Unrealized gains (losses) excluding (losses) (losses) realized amounts a Investments- Trading—Note F $ 207 $ - $ 207 Non-trading portfolios, net Asset-liability management—Note F - (699) (699) Investment portfolio—Note C - 29 29 Other b - (18) (18) Total $ - $ (688) $ (688) Table K5.2: In millions of U.S. dollars Fiscal Year Ended 2019 Unrealized gains Realized gains Unrealized gains (losses) excluding (losses) (losses) realized amounts a Investments- Trading—Note F $ (34) $ 385 $ 351 Non-trading portfolios, net Asset-liability management—Note F - 359 359 Investment portfolio—Note C - 32 32 Other b - (5) (5) Total $ - $ 386 $ 386 a. Adjusted to exclude amounts reclassified to realized gains/losses. b. Other comprises mark to market gains or losses on the borrowing and loan portfolios and on PSW NOTE L—CONTINGENCIES In light of the COVID-19 pandemic, IDA faces additional credit, market and operational risks. The duration of the COVID-19 pandemic is difficult to predict at this time, as are the extent and efficacy of economic interventions by IDA FINANCIAL STATEMENTS: JUNE 30, 2021 109 governments and central banks. The length and severity of the pandemic and the related developments, as well as the impact on the financial results and position of IDA in future periods cannot be reasonably estimated at this point in time and continues to evolve. IDA continues to monitor the developments and to manage the risks associated with its various portfolios within existing financial policies and limits. From time to time, IDA may be named as a defendant or co-defendant in legal actions on different grounds in various jurisdictions. The outcome of any existing legal action, in which IDA has been named as a defendant or co- defendant, as of and for the fiscal year ended June 30, 2021, is not expected to have a material adverse effect on IDA's financial position, results of operations or cash flows. 110 IDA FINANCIAL STATEMENTS: JUNE 30, 2021