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p. -1 of 18 BACK | NEXT Executive Summary I. Introduction II. Long-Term Vision and Strategy for ADF III. Operational Priorites IV. Use of ADF VII Resources to Date V. Financial Management VI. Conclusions

Asian Development Fund VII: Progress Report (1999)

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I. INTRODUCTION

1. In the January 1997 Donors' Report for Asian Development Fund (ADF) VII,¹ which was adopted by the Board of Directors, the Bank was requested to prepare a comprehensive midterm progress report on the implementation of the ADF VII objectives and recommendations, and to submit it to the Board of Governors through the Board of Directors for review in conjunction with the 1999 Annual Meeting of the Board of Governors. This progress report fulfills the Donors' Report request to:

1. formulate detailed recommendations on the issues of access criteria, performance evaluation, and allocation methodology; and
2. report on completed policy reviews and changes with regard to lending terms, graduation, and financial policies.

2. For the recommendations and the progress achieved to date to be appreciated in their proper context and perspective, this report provides a comprehensive review of the financial and policy framework for ADF VII. Thus, the second section recapitulates and reviews the long-term nature and time horizon of ADF planning and implementation. This report emphasizes that ADF represents, first and foremost, a process for assisting in the reduction of poverty in the Bank's Region, and ADF VII represents but a part of that long-term process. Section III shows that the Bank has established appropriate policies and procedures to ensure the effective use of ADF resources, and reports on how the operational priorities set out in the Donors' Report are being addressed and achieved through Bank policy initiatives. Section IV reports on the actual application of ADF VII resources during the first half of its implementation period. Section V reviews the status and difficulties facing full ADF VII financing, discusses the issues facing the remaining two years of ADF VII, and identifies the emerging issues facing ADF financial management beyond ADF VII. This report concludes with a recommendation on the next major steps in the ADF process.

3. The Asian financial crisis has added a new dimension to the demand and supply of ADF VII resources. On the demand side, the crisis has added to the requirements for ADF. The DMCs that were immediately and directly affected by the crisis received financing from the Bank's ordinary capital resources (OCR) for alleviation of adverse impacts, and hence did not place additional demand on the ADF. However, some of the other DMCs that are ADF borrowers and whose growth prospects are affected by fall out effects of the crisis, have looked to the Bank for increased ADF assistance to cushion the adverse and prolonged social impacts of the crisis. On the supply side of ADF VII resources, the Asian financial crisis has had three adverse impacts. First, actual movements in exchange rates of currencies of regional donor members in 1997 and 1998, along with a more general appreciation of the United States (US) dollar against most ADF donor currencies, substantially reduced the US dollar equivalent of donor contributions to ADF VII. The exchange rate movements also reduced the US dollar equivalent of the basket of currencies for ADF loan repayments supporting the expanded advance commitment authority (EACA), which in-turn lowers total EACA availability during ADF VII. Second, when considering proposals for amending (i.e., hardening) ADF loan terms, the Board of Directors requested that because of the Asian financial crisis, the amended terms should not have any medium-term negative impact on ADF-borrowing DMCs; consequently, the terms approved by the Board in December 1998 will not provide additional resources for increasing EACA during ADF VII. Third, the Bank responded quickly to members in distress with levels of OCR-financed assistance that were not previously planned for; this has resulted in deterioration in the Bank's decisive financial indicators, thereby constraining OCR excess net-income transfers to ADF after meeting reserve and technical assistance (TA) special fund requirements. All of these negative impacts of the crisis point to further challenges for ADF financial management in the remaining term of ADF VII and beyond.

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