81187 International Development Association Methodology Used for Encashment of Donor Contributions to IDA Technical Note No. 12 October 1989 1. At the meeting in September 1989, in reflect this proVISIOn, but this guideline has, Washington, D.C., an IDA Deputy proposed that subsequently, been made applicable to the eight the method of encashing contributions to IDA9 IDA Replenishments with certain modifications. be revised so that the shares based on the agreed contributions in SDR terms would be the basis 3. Translating this requirement into practice for encashments. Management was requested to did not present particular difficulties as long as prepare a technical note analyzing the all members' obligations were expressed in a implications of the suggested change. This common denominator, i.e., 1960 gold dollars, and technical note describes the current and proposed were subject to maintenance of value (MOV) in systems, compares illustrative drawdowns under terms of that standard. This system prevailed up both approaches and presents some issues for to and including the Third Replenishment. donors to consider in deciding which approach to Beginning with the Fourth Replenishment, adopt for IDA9. members' obligations were no longer subject to the MOV provisions. Since then, exchange rate Background fluctuations have caused donors' contributions (which for the most part are denominated in 2. The Articles of Agreement of the national currencies) to change in value when Association required that the Association "take expressed in terms of a common standard (the appropriate steps to ensure that, over reasonable U.S. dollar for IDA4 and IDA5 and the SDR intervals of time," the 90% initial subscriptions of for IDA6 to IDA8). Significant variations have original Part I members, payable in gold or freely resulted in (a) the total value of contributions, convertibl~ currency, be used "on an approx- and (b) a donor's "share" of the replenishment, imately pro-rata basis," except that the portion of when both are expressed in terms of a common such subscription "paid in gold or in a currency standard. Consequently, it has become less other than that of the subscribing member may be obvious what pro-rata should mean. After the used more rapidly." (Article IV, Section l(e)). adoption of several formulae to ensure that The terms of replenishments are not required to donors' contributions are drawn down pro-rata, Page 2 BOX.1: ENCASHMENT OFCONTRIBUTIONS TO . IDA ILLUSTRATIVE EXAMPLE ASSUMPTIONS: (a) CONTRIBUTIONS (ATTIME OFAGREEMEN1) Currency Unit . SDR % Obligation Equiwlent ~-·· CountJyA 125 /, 30().,,,<. ·. 33.33:_, .. Count.Jy B 450 '··· 3()(h<'<' . 33.33_, .. Count.Jy C 30() 30():>i·'· 33.33 (b) EXCHANGE RATES DURlNG TI-IE ENCASHMENT PERIOD: Country A 3% Depreciation Per Annum· Country B - 3% Appreciation Per Annum Country C No Change ...................................... - .......... ...................... CURRENT SYSTEM ....................................... Cumulative Percent Encashed ................ ...... As% of Unit Of Obligation As % Of Agreed SDR Contribution Years All Countries Countrv A . Countrv 8 Country C 1 2.8 2..7 2.9 z.tr•-'' 2 11.1 10.5 11.7 1Ll < 3 24.9 23.1 26.7 24.9,,,,<: 4 40.9 372 44.7 40.9.< 5 55.5 49.7 61.5 55S . 6 68.2 602 76.5 68;2<•. 7 79.4 69.4 . 89.7 79.4<.::'' 8 88.9 76.7 101.6 . 88'.9 ' ' ·' 9 <. 96.3 82.2. 111.0 96;3\ 10 100.0 85.5 117.0 too.o:'. ................................................ ................................................................................. PROPOSED SYSTEM ·CUmulative Percent Eitcashech , :-: As % -Of.. Unit of Obligation·', · As 9f>,of Agreed·, SDR Contribution,,, · · Years - --:.· Country A . Country B:_: Country .C :. Country 'A ,: Country B ,_ _ CountryC:, Page 3 the one which was found satisfactory was decided vis the SDR, the rate of encashment could either at the beginning of the Sixth Replenishment, and be left unchanged from the present system or be is still in effect. adjusted, along with that of all other donors, to take into account the liquidity gap created after 4. Under the current system, donors' full encashment of contributions from donors with contributions are drawn down in equal proportion depreciating currencies. The latter approach is in terms of their unit of obligation. Encashments used in the illustrative examples in this note. for each period are determined in such a way that the encashed amounts as a percentage of the face Impact on Donors value of the contribution of a country, as expressed in the currency of denomination is the 6. In order to analyze the impact on donors, same for each donor. However, when an illustrative example (Box 1) shows encashments are expressed in SDR terms (i.e., in encashments under both approaches. The results the same unit of account as IDA credits), the are also summarized graphically in Figure 1 (for payment shares may be quite different for encashments in terms of the currency unit of individual donors depending on fluctuations in obligation) and in Figure 2 (for encashments in exchange rates of their national currencies. Under terms of SDR shares). The example assumes that the present method, the drawdowns for each a particular replenishment is funded equally by country can be expected to be spread over the three countries and that exchange rates during the same period of time, i.e. about 10 years. encashment period move as follows: for Country A. the rates depreciate by 3% per annum; for Proposed Svstem for Note Encashment Country B, they appreciate by 3% per annum; and for Country C, its national currency remains 5. The system that has been suggested for unchanged vis-a-vis the SDR. As can be seen IDA9 aims at calculating calls on donors in a from the example, under the current approach the manner which would extend the agreed encashment rates for each call are the same for burdensharing percentages to the encashment each country. For instance, encashments through process. Encashments for each period would be years 2 and 5 are 11.1% and 55.4% percent, computed on the basis that the SDR value of the respectively, of the contribution of each country encashments of each country would represent its as expressed in its currency unit of obligation. pro-rata share in the replenishment. Donors Irrespective of changes in exchange rates, each would thus pay according to their respective donor is asked to pay in the same proportion. contribution shares fixed at the time of the However, the rates are quite different when replenishment agreement. In national currency expressed in terms of the agreed contributions in terms, this results in an aa:eleration of SDR terms. For instance, by the fifth year, encashments from countries whose currencies Country A would have paid 49.7% of its depreciate relative to the SDR, and a slowing contribution, while Country B's payments would down of encashments from countries whose amount to 61.5%. currencies appreciate against the SDR. The higher the rate of depreciation (or appreciation) 7. Under the proposed approach, the of the currency vis-a-vis the SDR, the faster there drawdown rates, measured in terms of the would be a divergence in the rate of encashments contribution shares in SDR terms, are exactly the in national currency terms. In the case of a same for each country in the initial years of the depreciating currency, encashments in national encashment period. They begin to vary when the currency would be much faster under the contribution of Country A (which has a proposed system. Depending on the rate of depreciating currency) is fully exhausted, in year depreciation, contributions from a donor with a 8. This would result in an exchange loss for IDA depreciating currency may be fully encashed well Thereafter, the Association would encash the before the other donors. Conversely, encashments balance of the contributions of the two other from a country with an appreciating currency will countries. Cumulative encashments from Country be completed at a later time. In the case of a B, shown in Box 1 with an appreciating currency, country with an unchanged exchange rate would only amount to 78 percent of its throughout the entire encashment period vis-a- contribution at the end of the eighth year. Page 4 .... ·::···_·_-_::: .. · ... :-:- aO~~:~~~=o~;;~ ':; !' 'i'', i . . . .,.,'. . ,. ,,/~, 11~ ·-· ·.lfl, ASSuW!l~~S: ·. -:·.·-:::·._ .. -.·_ · ~e u for Box l , ·except Cor exchange rates .• .·.····:·· .·• . ·••..•••••••••••.•• > .• • • • • • • • ·•· •. / •..• < Su~~(Shortfull)>·. Ali a % of Contribution & ·Total Replenishment . Assumed EXchange•Rate•. • Current••••··· Proposed Seenarioi · •· During Enc:ashment •Period } · System System · (Change Per ·Annum) CounttyA 3% Depreciation -14.5 -4.6 CounttyB 3% AppreciatiOn 16.9 _····· .· 6.3 . . . s% riepl'e(:iatioc >·· . .. . 5% Appn:ciation: Page 5 Encashments would continue through the tenth national currency are affected by changes year and there would be an exchange gain for in IDA's rate of disbursement, but not by IDA because of the continued appreciation of exchange rate changes. Under the new this country's currency. It is worth noting that, system, encashments would be accelerated even countries whose unit of obligation is the from countries whose currencies SDR would be affected by the proposed change. depreciate relative to the SDR, and For instance, encashments for Country C would slowed down from countries whose be recalled earlier under the proposed system currencies appreciate against the SDR. (fully encashed in year 9 versus year 10 under the Consequently, under this system, in current system), in order to fill the resource gap addition to the pace of disbursements, caused by the depreciation of Country A's exchange rates would introduce an contribution. additional uncertainty into the rate of encashments. Impact on IDA (b) Equitv among donors: Under the present 8. The effect on IDA resources is difficult system, for each call made, all donors are to measure precisely since the value of asked for the same percentage of their total encashments is determined by a number of factors contributions expressed in terms of their that interact simultaneously, including the unit/currency of obligation. Because of the exchange rate fluctuations coupled with the exchange rate movement, donors' shares of timing of such changes. Encashments under the any particular call (expressed in SDR terms) proposed system would be accelerated for may be quite different from their agreed depreciating currencies. This in turn, would help share of the replenishment. The proposed preserve the value of the replenishment since a system would extend the agreed larger proportion of the depreciating contribution burdensharing to the encashment process. would be "locked-in" at a faster rate. Box 2 illustrates the impact on IDA under various (c) Implications for IDA: In the absence of exchange rate scenarios. As can be seen, under maintenance of value, changes in the SDR all but Scenario III, the resource position is more value of the total replenishment can result favorable for IDA and its borrowers under the in a surplus or deficit of donors' total proposed system than under the current one. contributions compared with the agreed This is because, as stated above, encashments in value of the replenishment. The proposed the initial years have a greater value when drawn system would go some way toward providing down according to the proposed system. Under protection for IDA resources against Scenario III, the appreciation and depreciation of erosion caused by unfavorable movements one country is made up precisely by the of exchange rates since the value of corresponding depreciation and appreciation of contributions expressed in depreciating the other country resulting in no change in the currencies would be increased through overall value of the replenishment resources accelerated encashments. under both the current as well as the proposed encashment systems. Issues for Consideration 9. Deputies may wish to take account of the following issues: (a) Predictability of drawings: At present, the Association estimates encashment needs based on the projected funds needed to cover disbursements of credits financed by donor contributions. Under the present encashment formula, donor encashments in Page 6 =~M.~~~~-1.--~~~:Wm:tW.dt'f:lWllflf:t~t:Wm~~Km<:~'m~*'lt.i:\"t,%~'tl1lHM%~fWW~'i_..%'ti¥¥f¥t.WtiWWU.W. Figure 1: Cumulative Encashments of Contributions On Terms of Currency Unit of Obligation) Current System • 100%.------------------------------------------------=~ 80% 60% p e r c e 2 3 4 5 6 7 8 9 10 n Year t • Encashment rates are the same for all countries In terms of the unit of obligation for their contributions . E n c a s h e d 1 2 3 4 5 6 7 8 9 10 Change In Exchange Rates -+- 3~ Depreciation --+- 3~ Appreciation - N o Change • Page 7 ~~~~~~Wft:~~:lm:~;:;;~~W.l~~Wd't&'dhfBW:fl:~d·:M'Nf.t'%Mk::s:@~'::ffiE%1t:':::::::1~1~d%W . ?:ml~~§t. Figure 2: Cumulative Encashments of Contributions (In Terms of Agreed SDR Shares) Current System 120%~--------~--------------------------------------~ . 100% 80% 60% '1 p 40% ~ ! e I ~__L_------L----l---l......-__.l.,__~-~~----'1 20% r c 0% e 2 3 4 5 6 7 8 9 10 n Year t E For n Proposed System country e c 120% ~~------~----------------------------------~~ a s 100% r h I! I e 80% Country C I d Encaahmenll 60% end lor Country A 40% I I 20% I 0%~~--~--~--~~--~--~~--~1 2 3 4 5 6 7 8 9 10 Change In Exchange Rates ~ 3% Depreciation - - 3% Appreciation - N o Change