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p. 3 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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II. LONG-TERM VISION AND STRATEGY FOR ADF

5. By their nature, the development objectives and corresponding financial strategy of the ADF are long term. Consequently, the progress achieved thus far in ADF VII and the issues facing the remainder of the ADF VII term can be meaningfully and fully evaluated only against a long-term framework. This section reviews that framework, as set out in the ADF Donors' Report, covering 15 years (a time horizon of half a generation), of which ADF VII represents the initial 4-year time slice.

6. ADF VII was planned and designed to assist DMCs in achieving their overriding goal of freeing themselves from absolute poverty and to address the financial constraints increasingly limiting the multilateral assistance system. Accordingly, the donors have endorsed as the long-term vision of ADF, the complementary goals of (i) catalyzing and accelerating the pace of poverty reduction in the Region by supporting broad-based and equitable growth in DMCs, and (ii) accelerating the pace at which ADF becomes self-financing.

A. Catalyzing and Accelerating Poverty Reduction

7. ADF is the principal means by which the Bank can catalyze and sustain well-designed and concerted action by low-income DMCs to improve their living conditions and quality of life. ADF must contribute to the relaxation of financial, institutional, and policy constraints so as to enable the poorer DMCs to progressively address poverty, gender inequity, and environmental degradation by themselves and progress towards accessing nonconcessional official development assistance such as the Bank's OCR for sectors such as physical infrastructure or areas where the Bank's assistance provides additionality in terms of policy leverage, capacity building, regional cooperation, or resource mobilization. A further, gradual progression will be toward accessing of commercial financing. Such a progression to enhanced access to nonconcessional funds will allow the poorest DMCs to use ADF more for social and environmental projects to benefit the poorest and most vulnerable sections of society.

8. To facilitate the progression outlined above, the Bank adopted a formal graduation policy in December 1998.² Under the new policy, a systematic application of the criteria of per capita gross national product (GNP) and debt repayment capacity are used to determine ADF eligibility, resulting in the DMCs being classified into four groups with varying levels of access to ADF and OCR: (A) ADF-only; (B1) ADF with limited amounts of OCR; (B2) OCR with limited amounts of ADF; and (C) OCR-only. As DMCs move out of Group A and progress toward Group C, they will have increasing access to OCR. As DMCs move further along the development path, the policy envisages graduation of such DMCs from regular Bank assistance; here, the criteria are per capita GNP, extent of reliance on commercial sources of external financing, and stage of development of economic and social institutions. Cost-sharing limits for projects have been revised in line with the new groupings and new cost-sharing norms have been introduced for Bank technical assistance (TA) to enhance DMC ownership. The formal graduation policy is an important addition to the Bank's policy framework for development assistance in general, and the role of ADF in particular.

9. As a result of the new graduation policy, the status of eligibility for ADF and OCR has changed for many of the DMCs. Effective 1 January 1999, the following DMCs graduated from ADF-only to ADF-with-limited-OCR status: Bangladesh, Cook Islands, the Federated States of Micronesia, Pakistan, the Republic of Marshall Islands, Sri Lanka, Tonga, and Viet Nam. Indonesia is on a watchlist for graduation out of ADF. People's Republic of China (PRC) and India are classified as Group B2 countries eligible for OCR with limited amounts of ADF; however, as mandated by the donors, PRC and India would not have access to ADF during the ADF VII period. Kazakhstan, Papua New Guinea, Philippines, and Uzbekistan graduated from ADF-OCR blend to OCR-only, with a two-year period allowed in the case of Papua New Guinea for graduation to take effect. Thailand ceased to have ADF access in 1983 and this status is formalized by graduation to Group C. Finally, four DMCs, Hongkong, China; the Republic of Korea; Singapore; and Taipei,China have been graduated from regular Bank assistance altogether. They would, however, be eligible for emergency assistance from the Bank, as necessary.

10. Even as the classification under the graduation policy recognizes the progress made by DMCs in the past, donors appreciate the vast need for social and economic reform programs and associated investments required in poorer DMCs to eradicate absolute poverty. Having been instrumental during ADF VI in focusing the planning of development assistance on a broader and more comprehensive framework, donors recognize that significant financial support from them is essential to enable ADF to accelerate the pace of economic development and poverty reduction in the Region through the continued implementation of the Bank's strategic development agenda.

B. The Self-Financing Objective

11. The second thrust of the vision for ADF is to make ADF progressively self-financing in the long term. While donors recognize that their continued financial support is necessary to help ADF achieve this long-term goal, they would like to see such support combined with a larger generation of nondonor resources over time, so that nondonor resources account for a greater share of total resources to finance the Bank's concessional operations. Replenishments by donors, while remaining critical in the near to medium term, would be supplemented by other major sources of funds to sustain ADF. The strategy for ensuring progress towards this long-term goal of self-financing is to integrate the gradual progression of countries noted in para. 7 and the strengthening of the financial management of ADF.

12. In support of this second thrust of the ADF vision and strategy, the Bank has recently adopted new policies to strengthen the efficiency and effectiveness of financial management of ADF. These new policies include:

1. establishment of a new financial planning framework for the management of ADF resources, including adoption of the EACA scheme;
2. hardening of loan terms for new loans to ADF borrowers;
3. treatment of ADF loan savings and cancellations to increase EACA; and
4. interpretation of the Bank's Charter by the Board of Directors confirming that-under certain terms and conditions-the allocation of OCR net income to ADF is possible.

These new policies and their impacts on the management of ADF resources toward the long-term goal of self-financing are discussed further in Section V (Financial Management).

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